Micro-economics
Terms
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- Define economics
- The study of how people allocate their limited resources to satisfy their unlimited wants.
- Describe the difference between microeconomics versus macroeconomics
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Micro – the decision making undertaken by individuals and firms
Macro – the behaviour of the economy as a whole - Explain rational self-interest
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We assume that individuals do not intentionally make decisions that would leave them worse off.
Incentives encourage us to engage in a particular activity. - discuss economic as a science
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Economics is a social science that uses models or theories – simplified representations of the real world used as a basis for predictions or explanations.
Ceteris paribus – all other things being equal.
Economics is called an empirical science. - Differentiate between positive versus normative economics
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Positive economics is a statement of “what is”
Normative economics is a statement of “what ought to be.”
Examples:
a) The temperature today was 33 degrees.
b) It was very hot today.
c) The price level rose by 4.4% last year.
d) Inflation eroded living standards last year and should be reduced. - CanadaÂ’s socio-economic goals
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1. Full employment
2. Efficiency – efficient allocation of resources
3. Economic growth
4. Price stability
5. Distribution of income - Give an example of the scarcity of resources
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Factors of Production or resources:
1. Land – natural material
2. Labour – human resource
3. Productive (physical) capital – factories and equipment
4. Human capital – education and training of workers
5. Entrepreneurship – managing, organizing factor of production - Identify the opportunity cost associated with scarcity
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Opportunity cost = amount given up over amount gained.
The value of the next best alternative (we only look at two alternatives at a time). Cost is always a forgone opportunity. - explain the production possibilities curve
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Production possibilities curve is a curve representing all possible combinations of total output that can be produced assuming:
1. Fixed resources
2. Productive efficiency
3. Resources are fully employed (everyone is working)
4. Fixed time period
5. Fixed technology
6. Two products - Relate specialization to productivity
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increase capital goods, economic growth, increase production of everything, shifts the production possibilities curve outward
Capital goods - produce other goods more efficiently "future goods"
Consumption (consumer) goods decrease consume directly "present goods"
Specialization decrease working at a well-defined activity
- usually leads to an increase in productivity
Absolute advantage decrease being more productive at doing something than anyone else.
Comparative advantage decrease.lowest opportunity cost
Productive efficiency - produce a good using the least cost.
Allocative efficiency - produce products most wanted by society. - Identify the basic economic questions
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1. What and how much will be produced?
2. How will it be produced?
3. For whom will it be produced? - Classify economies
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A.) Pure Command Economy:
• public ownership of resources
• central authority decides the 3 basic questions
and
Pure Capitalist Economy:
• private ownership of resources
• many people decide the 3 basic questions (circular flow model) - Key Features of pure capitalism:
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1. Private ownership of resources
2. Self interest
3. Consumer sovereignty
4. Market and prices
5. Competition
6. Limited Government - Describe how a pure capitalist system answers the three basic economic questions.
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1. What and how much will be produced?
2. How will it be produced?
3. For whom will it be produced?
In Canada, does the government play a role?
Canada is a Mixed Economy
DEBATE COMMAND VS CAPITAL ECONOMIES
Ex-Soviet - Specify the law of demand
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A market refers to all the Law of demand -
As prices fall the corresponding quantity demanded rises (inverse relationship) - Distinguish between a change in quantity demanded and a change in demand
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A change in quantity demanded is a movement along the demand curve. Usually happens when price changes.
A change in demand is a shift to a whole new demand curve.
Other determinants are:
Income
– normal goods
- inferior goods
Tastes or preferences
Prices of related goods
- Substitutes can satisfy a similar want or need
- Complements are used together
Consumer expectations with respect to future prices
Population
Changes in demand - shifts to the left or right
Changes in quantity demanded – movement up & down the demand curve - Specify the law of supply
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Law of supply
As prices rise the corresponding quantity supplied rises (positive or direct relationship)
Market supply - horizontally sum all the individual firm's supply - Distinguish between a change in quantity supplied and a change in supply.
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A change in quantity supplied is a movement along the supply curve. Usually this occurs when price changes.
A change in supply is a whole new supply curve.
Other major determinants:
Costs of inputs used to produce the product.
Technology and productivity
Taxes and subsidies
increase taxes
increase subsides
Price expectations
Number of firms in the industry
Change in supply - shifts to the left or right
Change in quantity supplied - movement up & down supply curve - where is the equilibruim
- Equilibrium is where quantity demanded and quantity supplied are equal.
- Explain how goods are rationed
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In the pure price system, price rations goods.
Other methods might be:
-First come, first served
-Political power
-Physical force
-Culture, religion, physical differences
-Lotteries
-Coupons - explain price ceilings
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Price controls are usually government-mandated minimum or maximum prices that may be charged for goods or services.
Price ceiling is a legal maximum price that may be charged for a good or service.
Shortages lead to black markets.
When controls are used, the rationing ability of the free market will be rendered ineffective. - explain price floor
- Price supports are minimum prices fixed by government that are above equilibrium prices. (minimum wage)
- what is scarcity
- Scarcity is the situation where the ingredients for producing the things that people desire are insufficient to satisfy all wants.
- what is a trade-off
- Trade-off – to produce more of one product we will have to produce less of another.
- what is the law of increasing relative cost
- Law of Increasing Relative Cost - is caused by resources not being perfectly adaptable
- what does demand mean
- Demand is a schedule of how much of a good or service people will purchase at any price during a specified time period, other things being equal.
- define supply
- Supply is a schedule showing the relationship between price and quantity supplied for a specified period of time, other things being equal.