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Economics 101 - Principles of Microeconomics


Department
Economics
Course Code
ECON 101
Professor
Robert Gateman

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Economics 101: Principles of Microeconomics
Markets in Action
I Interaction Among Markets
General Equilibrium: analysis of all markets simultaneously
Changes in one markets, affect all markets
Partial Equilibrium: analysis of a market in isolation, assuming no feedbacks (small
markets)
II Government Controlled Prices
Disequilibrium Price: quantity actually exchanged determined by the lessor of Qd or Qs
Price 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 price
Price 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, seller's
preference
III Case studies
Rental 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 assistance
Labour market
o Minimum wage price floor creates excess labour → unemployment
o Existing workers benefit, producers suffer increased labour costs, and new workers
lose
IV Introduction to Market Efficiency
Demand is a value, the maximum price willing to be paid = benefit to the consumer
Supply is a cost, the minimum price = cost to producer = lowest acceptable price
Economic Surplus = area below demand and above supply = total surplus = net value to
society
Market efficiency = maximized economic surplus
o Free market finds a market clearing equilibrium, perfect competition
o Demand = Supply
Government intervention in free markets:
o Reduces economic surplus
o Redistributes economic surplus (normative decision)
V Agriculture and the Farm Problem
Long term trends - farm income falls

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Economics 101: Principles of Microeconomics
o Increasing domestic supply: high productivity, technology change = supply increase,
curve shifts right
o Lagging domestic demand: low income elasticity of food demand = small increase of
demand as income rises
o Decreasing export demand: third world countries have increased demand, EU
subsidizes production
Short term trends - farm 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 demand = price volatility
o Poor substitutes → D inelastic → P volatility
Government agriculture policy aims to raise farm incomes above Pe and stabilize them
o 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 revenue
Agriculture Policy in Canada:
o Marketing boards (supply management)
Set quotas, regulate farmers, regulate prices, tariffs
o Marketing agents
Canadian wheat board (all farmers required to see to CWB)
Farmers paid at a world-wide rate
o Income Supplements (farm safety net programmes)
AgriStability - crop failure insurance
AgriInvest - stabilize income in event of fluctuations
Government bailouts
VI Exchange Rate and Trade
e or ER = price of foreign exchange (in terms of domestic currency)
ev = external value of Cdn dollar = price of domestic currency (in terms of foreign
exchange)
o e = 1 / ev
Demand for Cdn $ depends on: demand for Cdn products and capital inflow (foreign
investments)
Supply of Cdn $ depends on: demand for foreign markets, capital outflow (foreign
investments by Canada)
Tariffs: a tax on imports that is additional to the world price of the product
VII Excise Tax Incidence
Excise tax: a singular consumption tax
o Ad valorem = % of value of product
o Specific = per unit tax
Tax incidence = on whom the ultimate burden of the tax lies = % of tax paid by consumer
and producer
VIII Effects of Government Intervention
Government intervention has a cost, requires alternative allocation of mechanisms

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Economics 101: Principles of Microeconomics
o May create excess demand or supply which both have implications
o Free market creates allocation efficiency
Chapter 1
1.1 Complexity of the Modern Economy
Economy: a system in which scarce resources are allocated among competing uses
Self Organizing Economy
An economy based on a free market system is self organizing
Individual consumers and producers act independently → creates economic order
Adam Smith: people are not generous, they do things out of their own self interest
Efficient Organizing
Adam Smith: the self organizing, self interest driven economy is relatively efficient
o Resources are organized/distributed and produced efficiently
Decision makers respond to prices determined in the market with regards to scarcity or
plenty
Main Characteristics of Market Economies
Self Interest: individuals pursue self interest, buying/selling what is best
Incentives: people respond to incentives (sellers sell → high prices, buyers buy → low
prices
Market Prices and Quantities: prices/quantities determined by sellers competing for buyers
Institutions: all governed by set of institutions (private property, freedom of contract, rule
of law)
1.2 Scarcity, Choice and Opportunity Cost
Consumer demand < world resources (scarcity)
Cannot have everything we want, decision making process must take place
Alfred Marshall: Economics is a study of mankind in the ordinary business of life
Economics is the study of the use of scarce resources to satisfy unlimited human wants
Resources
Resources 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 mental/physical human resources
o Capital: all manufactured aids to production (tools, machinery and buildings)
Scarcity and Choice
Average Canadian family makes $72,000 after taxes (still cannot satisfy all needs/wants)
Scarcity implies choices must be made, and making choices implies existence of costs
Opportunity Cost
To balance costs, one thing must be given up for another product/service
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