Economics 101 - Principles of Microeconomics

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ECON 101
Robert Gateman

Economics 101 Principles of MicroeconomicsMarkets in Action I Interaction Among MarketsGeneral Equilibrium analysis of all markets simultaneouslyChanges in one markets affect all marketsPartial Equilibrium analysis of a market in isolation assuming no feedbacks small markets II Government Controlled PricesDisequilibrium Price quantity actually exchanged determined by the lessor of Qd or QsPrice Floor minimum price cannot fall below o Excess supply labour markets unemployed agriculture market stockpiling o Producers gain if they are lucky to sell more o Consumers lose because of a set minimum pricePrice Ceiling maximum price cannot go above o Excess demand labour market labour shortage agriculture market dumping o Consumer gain if they are able to buy for less o Producers lose because they could have sold more o Short supply leads to black market first come first served rationing sellers preference III Case studiesRental housing market o Short term supply of housing inelastic effective rent ceiling increases demand o Long term decrease in housing supply housing conversions shortages o Policy Alternatives status quo subsidized housing public housing income assistanceLabour market o Minimum wage price floor creates excess labourunemployment o Existing workers benefit producers suffer increased labour costs and new workers lose IV Introduction to Market EfficiencyDemand is a value the maximum price willing to be paidbenefit to the consumerSupply is a cost the minimum pricecost to producerlowest acceptable priceEconomic Surplusarea below demand and above supplytotal surplusnet value to society Market efficiencymaximized economic surplus o Free market finds a market clearing equilibrium perfect competition o DemandSupplyGovernment intervention in free markets o Reduces economic surplus o Redistributes economic surplus normative decision V Agriculture and the Farm ProblemLong term trendsfarm income falls Economics 101 Principles of Microeconomicso Increasing domestic supply high productivity technology changesupply increase curve shifts right o Lagging domestic demand low income elasticity of food demandsmall increase of demand as income rises o Decreasing export demand third world countries have increased demand EU subsidizes productionShort term trendsfarm prices fluctuate o International markets cause farm prices to fluctuate changes in export prices o Domestic markets cause farm prices to fluctuate o Unplanned change in supply and inelastic demandprice volatility o Poor substitutesD inelasticP volatilityGovernment agriculture policy aims to raise farm incomes above Pe and stabilize themo Price support and quotas o Price support becomes a level at which governments will buy at o Quotas are lowered but price raised in order to increase quota holder revenueAgriculture Policy in Canada o Marketing boards supply managementSet quotas regulate farmers regulate prices tariffs o Marketing agentsCanadian wheat board all farmers required to see to CWBFarmers paid at a worldwide rate o Income Supplements farm safety net programmesAgriStabilitycrop failure insuranceAgriInveststabilize income in event of fluctuationsGovernment bailouts VI Exchange Rate and Tradee or ERprice of foreign exchange in terms of domestic currencyevexternal value of Cdn dollarprice of domestic currency in terms of foreign exchange o e1ev Demand for Cdndepends on demand for Cdn products and capital inflow foreign investmentsSupply of Cdndepends on demand for foreign markets capital outflow foreign investments by CanadaTariffs a tax on imports that is additional to the world price of the product VII Excise Tax IncidenceExcise tax a singular consumption tax o Ad valorem of value of product o Specificper unit taxTax incidenceonwhom the ultimate burden of the tax lies of tax paid by consumer and producer VIII Effects of Government InterventionGovernment intervention has a cost requires alternative allocation of mechanisms Economics 101 Principles of Microeconomicso May create excess demand or supply which both have implications o Free market creates allocation efficiency Chapter 1 11 Complexity of the Modern EconomyEconomy a system in which scarce resources are allocated among competing uses Self Organizing EconomyAn economy based on a free market system is self organizingIndividual consumers and producers act independentlycreates economic orderAdam Smith people are not generous they do things out of their own self interest Efficient OrganizingAdam Smith the self organizing self interest driven economy is relatively efficient o Resources are organizeddistributed and produced efficientlyDecision makers respond to prices determined in the market with regards to scarcity or plenty Main Characteristics of Market EconomiesSelf Interest individuals pursue self interest buyingselling what is bestIncentives people respond to incentives sellers sellhigh prices buyers buylow pricesMarket Prices and Quantities pricesquantities determined by sellers competing for buyersInstitutions all governed by set of institutions private property freedom of contract rule of law 12 Scarcity Choice and Opportunity CostConsumer demandworld resources scarcityCannot have everything we want decision making process must take placeAlfred Marshall Economics is a study of mankind in the ordinary business of lifeEconomics is the study of the use of scarce resources to satisfy unlimited human wants ResourcesResources are divided into three categories land labour and capital factors of production o Land all natural endowments land forests lakes crude oil minerals o Labour all mentalphysical human resources o Capital all manufactured aids to production tools machinery and buildings Scarcity and ChoiceAverage Canadian family makes 72000 after taxes still cannot satisfy all needswantsScarcity implies choices must be made and making choices implies existence of costs Opportunity CostTo balance costs one thing must be given up for another productservice
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