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Economics Chapters 5-8.docx -Review for Test #2

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Department
Economics
Course
ECO105Y1
Professor
Paul Cohen
Semester
Fall

Description
Economics Chapters 5-8 Review (Micro) th Test #2- December 5 Chapter 5: What Gives When Prices Don’t? (Government Choices, Markets Efficacy, and Equity) -When price is fixed below market-clearing, shortages develop (quantity demanded greater than quantity supplied) and consumers are frustrated. Quantity sold = quantity supplied only. -When price is fixed above market-clearing, surpluses develop (quantity supplied greater than quantity demanded) and businesses are frustrated. Quantity sold = quantity demanded only Fixed Prices = No coordinated Prices- The only way shortages or surpluses disappear is by quantities adjusting to whichever is less. With fixed prices, either the consumer or business is frustrated. Rent Controls: Example of price ceiling, maximum price set by government, making it illegal to charge higher price. “Robin Hood Principal”: To take from the rich, and give to the poor. -Housing shortages, an unintended consequence of rent controls, give landlords the upper hand in dealings with tenants. -A contributing factor to the shortage of housing may be that landlord’s benefits no longer exceed opportunity costs. -Remaining tenants may not see the incentive of keeping the rented space in good condition, and may start collecting “key money”. -Unintended consequence of rent controls is subsidizing well-off tenants willing and able to pay market-clearing rent. -Alternative policies to help the homeless are government subsides, to help the poor pay rent, and government-supplied housing. But all polices have opportunity costs to consider. -Living Wage: 10$ per hour, enough to allow an individual in a Canadian City to live above the poverty line. -Minimum Wage Laws: example of a price floor, minimum price set by government, making it illegal to pay lover price. -When governments set minimum wages above market-clearing wage, quantity of labor supplied by households, will be greater than quantity of labor demanded businesses, creating unemployment. -Quantity of unemployment creating is increased minimum wage depends on the businesses elasticity of business demand for unskilled labor. -Alternative polices to help working poor are, training programs and wage supplements. But all policies have opportunity costs to consider. -To say that well functioning markets produce products/services we value most means outputs go to the most willing and able to pay. Efficient market outcome may not be fair or equitable. -Efficient market outcome: coordinates smart choices of business’s and consumers so outputs produced at lowest cost (price just covers all opportunity cost of production) and consumers buy products/services providing most band per buck (marginal benefit greater than price). -Consumers who do not buy at market-clearing prices are unwilling because marginal benefit is less than price. Even though they can afford to buy, or are unable to afford to buy even though they are willing and marginal benefit is greater than price. -In the public Canadian health care system, everyone has relatively equal access to health care services. Prices paid by consumers (zero) and governments fix supplies. Resulting in shortages and inefficiency’s because quantity demanded exceeds quantity supplied. -In the private U.S health care system, anyone willing and able to pay has access to health care services. Prices are set efficiently in markets, in that prices adjust to match quantities demanded and supplied. Those unable to pay do not receive health care services, resulting in inequity. -The simplified comparison of health care in Canada and the U.S leaves out many details to highlight the trade-off between efficiency and equity. Positive statements: about what is; can be evaluated as true or false by checking the facts. Normative statements: about what you believe should be; involve value judgments. -Normative statements often use the word “should” and cannot be evaluated as true or false by checking the facts. -Once you pick a political position on social goal to support, based on your values, economic thinking helps identify the smartest choice of action to efficiently achieve benefits against opportunity cost. Chapter 6: Finding the Bottom Line (Opportunity costs, economic profits and losses, and the Miracle of Markets) Accounting Profits = Revenues – Obvious costs (including deprecation) Depreciation: Tax rule for spreading cost over lifetime of long-lasting equipment. -Deprecation also means decrease in value because of wears and tears and because equipment becomes obsolete. Obvious costs: Costs a business pays directly Accounting profit: Revenues minus obvious costs (including deprecation). Implicit Costs: Hidden opportunity costs of what business owners could earn elsewhere with time and money invested -Wahid’s hidden opportunity cost (implicit cost) of investing his own 30’000 in his risky business is 20 percent expected return, on $6000—Sum of guaranteed bank return of 5 percent plus risk compensation of 15%. Normal Profits: Compensation for business owner’s time and money, sum of hidden opportunity costs (implicit costs), what business owner must earn to do as well as best alternative use of time and money. Economic Profits: Revenues minus all opportunity costs (obvious costs plus hidden opportunity costs). Economic Profits = Revenues – All opportunity costs = Revenues – (Obvious Costs + Hidden Opportunity costs) Economic Profits = Revenues – (Obvious Costs + Normal Profits) = Revenues – Obvious costs + Implicit costs Economic losses: Negative economic profits -If revenues are less than all opportunity costs, business owner has not made a smart decision. Would be better off in alternative uses of time and money. With economic losses, business owner not even earning normal profits. -Rule for smart business decisions: choose only when economic profits are positive -When businesses focus on bottom line—pursuing economic profits—unintended consequence is markets produce what consumers want. -Economic losses are red lights, signaling not-smart business decisions—get off that road. Breakeven Point: Business just earning normal profits (no economic profit, no economic losses) -Economic profits are green light signaling smart business decisions—get on that road. Market Equilibrium: quantity demanded = quantity supplied. Economic profits are zero and there is no tendency for change -Changes in economic profits trigger changes in supply, changing price and bringing demand and supply into balance. On the supply side economic profit is the
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