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microeconomics chapter 1-5 MIDTERM CECN KHYATI ANTANI

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ECN 104
Tsogbadral Galaabaatar

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May, 19 , 2013 Chapters 1-5 Microeconomics Chapter 1 & 2 Wants: needs and desires for goods and services Ex. Needs: You’re sick, you need a doctor Desire: You want a BMW Goods: Something tangible Services: Something Intangible (-Most for the least) 1. Wants are Unlimited  Wants can be satisfied by consuming goods and services (g + s) Choices  Resources are required to produce (g + s) (-Best use of scarce resources 2. Resources are Limited/ Scarce -Efficient Resource allocation) Opportunity Cost: Alternatives sacrificed when a choice is made Economics is about minimizing opportunity cost Micro: Specific or individual households, businesses or industries. (Ex. Gas, airlines) Economics Macro: Aggregate; entire economy (ex. Canada’s inflation/Economy/ Industries) Positive: Fact; what is Economic Statements Normative: Opinion; what ought to be Resources (inputs/ factors of production) 1. Land (primary): All natural resources on or under the earth, in the air or under water. 2. Labour: All physical, mental, skilled & unskilled work. (Done by people/ humans) 3. Capital: All man made tools machines etc. Is used for further production. (ex. Hammer, road) 4. Enterprise: Combines and directs all other resources (ex. Ryerson, General motors) May, 19 , 2013 Chapters 1-5 Circular Flow: 1. Demand g + s Households: 2. Supply resources 1. Demand Resources Businesses/ Firms: 2. Supply g + s Circular flow diagram [Product Market] Expenditure on g + s g + s [Households] [Businesses] Resources Incomes [Resource/ Factors of market] = Real flow ------ = Monetary flow 4 sources of income 1. Rent 2. Wages 3. Interest 4. Profit Residual Income (leftover income) Uncertain May be negative Basic Economic Question: 1. What to produce? 2. How to produce? 3. Where to produce? 4. When to produce? 5. For whom to produce? May, 19 , 2013 Chapters 1-5 (Public production for welfare) (Private production for profit) ●--------------------------------------------------------------------------● Pure command economy Pure Market (Communism) (Capitalism) -Gov’t/ State owned Features: -Gov’t/ Sets targets 1. Private ownership of resources 2. freedom of choice 3. freedom of occupation 4. freedom of enterprise 5. Motivated by self interest Consume: Max satisfaction Producer: Max profit 6. Gov’t follows a policy of “laissez- faire” (no government intervention) 7. Invisible Hand: guides the economy, market forces of supply and demand Production Possibility Curve (PPC): The PPC shows all the combinations of the 2 goods, which a country can produce if it uses all of its resources Assumptions: 1. 2 goods Ex. Guns & Butter 2. Given resources 3. Fixed technology 4. Full employment of resources E Butter Guns A 10 0 D 1 < B 9 1 C 2 < C 7 2 B 3 < D 4 3 A 4 < E 0 4 Examples of True/False Questions:  The PPC shows all the combinations that a country desires: F (**A country is capable**)  If a country uses its unemployed resources its PPC shifts outwards: F May, 19 , 2013 Chapters 1-5 PPC features: 1. Downward sloping 2. Increasing opportunity cost 3. Any combination inside the PPC is possible but inefficient 4. Any combination outside the PPC is unattainable 5. Any Combinations on the PPC is possible and efficient 6. It’s Possible to shift PPC outwards  More resources  Better technology  Higher productivity CHAPTER 3 DEMAND AND SUPPLY Market: Any institution that brings together (electronically or physically) the buyers [demand (dd)] or the sellers [supply (ss)] to exchange g + s Demand: Desire for a g+s backed by: a. Ability to pay b. Willingness to pay Relationship between price & quantity demanded (Demand Schedule) Q(dd)= f(P) Price Q(dd) 6 0 5 1 There is an inverse or a negative relationship between price and 4 2 3 3 quantity demanded. (P & Q (dd)) 2 4 1 5 dd Curve Demand Curve is always downward sloping Law of Demand: Other things being equal, people buy more at lower prices than at higher prices Why? 1. Income Effect: If price (P↓) goes down, real income/ purchasing power ↑, therefore can buy more 2. Substitution effect: If ‘A’ and ‘B’ are substitutes & if price of ‘A’↓ people may switch from B to A, therefore demand for ‘A’ ↑ th May, 19 , 2013 Chapters 1-5 Contraction of Demand c a Expansion of demand b dd Curve  When people buy more or less because of a change in price, its called: (Change in Q (dd)) Expansion Contraction **(“+” positive | “-“ Inverse)** When 2 variable move in Other Factors affecting Demand (dd)/ Factors which shift the Demand (dd) curve the same directi↑↑: 1. Income a. For ‘normal’ goods dd↑ as income ↑ (+) [Positive/ Direct relationship] b. For ‘inferior’ goods dd↓ as income ↑ (-) [Inverse relationship] 2. Taste and preferences (+) When 2 variable move in the opposite directi↑↓, 3. Number of buyers (+) 4. Expected future price (FP): If FP ↑, current dd ↑(+) 5. Price of related products: 1. Substitute goods: ‘A’ or ‘B’ (+) PPepsi, dd coke↑ (+) P ↓, dd ↓ (+) pepsi coke 2. Complementary goods ‘A & B’ (-) P cars dd gas (-) P cars dd gas-) When people buy more or less, because of a change in other Increase in factors is called : (Change in Demand) Demand (dd) Increase Decrease Decrease in demand (dd) dd Curve M/C example: When people buy less at a higher price  contraction What if people buy more because of higher income  expansion May, 19 , 2013 Chapters 1-5 SUPPLY: Availability of goods and service relationship between price & Q (ss) Supply schedule Q(ss)= f(P) Change in quantity supplied SS P Q(ss) curve 1 0 there is a direct/ positive relationship 2 1 between P&Q (ss) 3 2 4 3 5 4 6 5 Supply curve is Upward Sloping When sellers move up/down the supply curve is the change in quantity supplied Other factors affecting (ss)/ factors which shift the (ss) 1. Availability of resources (+) 2. Cost of resources (-) 3. Technology (+) 4. Weather (+) 5. Number of sellers (+) 6. Expected future Price (FP): if expected FP↑, current SS↓ (-) 7. Taxes (-) Change in Supply Decrease in supply (ss) P Increase in supply (ss) Q(ss) M/C Examples: Higher taxes will lead to a/an a. Upward movement in the ss curve b. Downward movement in the ss curve c. Outward shift in the ss curve d. Inward shift in the ss curve May, 19 , 2013 Chapters 1-5 P Q(dd) Q(ss) Shortage - / Surplus+ Pressure on Price 2 40 0 -40 Upwards 3 35 5 -30 Upwards 4 30 10 -20 Upwards 5 25 15 -10 Upwards EP 6 20 EQ 20 0 None 7 15 25 10 Downwards 8 10 30 20 Downwards 9 5 35 30 Downwards 10 0 40 40 Downwards If Q(dd) < Q(ss)  Surplus  P↓ If Q(dd) > Q(ss)  shortage P↑ If Q(dd)= Q(ss)  Equilibrium P stays 10 SURPLUS ss Curve 8 P 6 E Q(dd) = Q(ss) 4 2 dd Curve SHORTAGE EQ 10 20 30 40 Q th May, 19 , 2013 Chapters 1-5 Chapter 3 Continuation of Demand & Supply Changes in the market: 1. Increase In Demand (dd) 2. Decrease in Demand (dd) SS SS EP1 E1 EP ↑ E EP ↓ EP E EQ ↑ EP E EQ ↓ EP2 2 d1 dd dd dd2 0 EQ EQ 1 0 EQ2EQ Q If changes in the market come from the dd (demand) side then EP(equilibrium price) & EQ(equilibrium quantity) are moved in the same direction. 3. Increase in Supply (ss) 4. Decrease in Supply (ss) SS4 SS SS SS3 E4 EP ↑ EP ↓ E4 E E EQ ↑ EP EQ ↓ EP E3 3 dd dd 0 EQ EQ 0 EQ4EQ 3 If changes in the market come from the ss (supply) side then EP & EQ are moved in the opposite direc
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