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Chapter 1-4

Economics Chapter 1-4 Notes.docx

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Department
Economics
Course
ECO100Y5
Professor
Kalina Staub
Semester
Fall

Description
ECONOMICS CHAPTER 1-4 NOTES Chapter 1 Opportunity Cost: The cost of using resources for a certain purpose, measured by the benefit given up by not using them in their best alternative use Scarcity: implies that choices must be made and making choices implies the existence of costs Chapter 2 Normative Statements: a statement about what ought to be as opposed to what actually is Positive Statements: a statement about what actually is as opposed to what ought to be 3.1 Demand -Quantity Demand- total amount of a particular good or service that a consumer would like to purchase over a period of time. Often referred to as desired quantity. -Quantity Bought- the actual amount of good or services purchased -Factors that influence the amount of good bought in a market: products price, consumers income, prices of other products, tastes, population and expectations for the future -Stocks- a variable whose value has a meaning at a point in time (10,000 eggs on September 3 ) -Flow Variable- a whose value has meaning at a rate per unit if time (10,000 eggs a month) Quantity Demande and Price -The Law of Demand: the price of a product and the quantity of demand are related negatively. The lower the price the higher the demand, the higher the price the lower the demand. -If the price of a particular product goes up consumers are likely to choose other brands of the product, buy less of the product or stop buying it all together. -Conversely if the price of a product goes down, consumers are likely to buy more of the product and less of other similar products whose prices have remained constant. Demand schedules and demand curves -demand schedule is a table while demand curve is a graph that represents the relationship between the quantity demanded and the price of a product assuming all other factors remain constant 5 Causes of shift in the demand curve 1- Consumer Income: the demand curve is drawn assuming all other factors remain constant. However, if other factors such as a consumers income were to change, so would the curve. The higher the income would result in a shift to the right signifying a raise in demand for a product while conversely owed income would result in a shift to the left. 2- Prices of other goods: substitutes in consumption are goods that can be used in place of another good. The demand and cost of apples can change in comparison in two ways. Firstly, if the price of apples falls or if the price in oranges rise. In either case the demand for apples would increase while the curve shifts to the right. Complements in consumption- goods that tend to be consumed together (cars and gas) A drop in the price for cars would result in the demand for both cars and gas to go up even if the price for gas remains constant. 3- Tastes- shifts in tastes such as the shift from the typewriter to the computer have major affects on the market. Other factors such as fads in Need For Speed for example can cause the demand curve for a popular product to shift to the right of the demand curve. 4- Population: A rise in population will result in a rise increase of demand of products at each price 5- Expectations for the future- the demand of for a product can increase as a result of the anticipation of a future event Movements along the curve versus shifts of the whole curve -change in demand: a chafe in the quantity demanded at each possible price commodity represented by a shift in the whole demand curve -change in quantity demanded: a change in the specific quantity of the goo demanded, represented by a change from one point on a demand curve to another, either on the original demand curve or a new one -An increase in demand means that the demand curve shifts to the right and hence the quantity demanded will be higher at each price. A rise in price causes movement upward and to the left, meaning the demand will fall. 3.2 Supply -Quantity Supplied- the amount of goods/services that produces WANT to sell over a period of time (flow) -Quantity Sold- the actual amount of goods a producer sells over a period of time -Factors that influence the quantity supplied: products own price, prices of inputs, technology, government taxes/subsidies, prices of other products, number of suppliers -a basic economic hypothesis is that the quantity supplied and the price of a product are positively related, meaning that the higher the price of a product the more producers will supply a product -supply schedule and curve- represent the relationship between the amount supplied and the price of a product in a table and graph Causes in shifts of the supply curves 1- Prices of inputs: inputs refer to the cost it takes to make a product. Therefore, the higher the input the less a firm will produce. (doesn't shift curve) 2- Technology: technology makes it easier it is to produce products and also lowers inputs at the same time. Therefore due to technological innovation, an increase in supply occurs. 3- Government Taxes/Subsidies: an increase in government taxes for a product will result in higher inputs and s shift in the supply curve to the left. Conversely, as goods are subsidized, it increases profitability and shifts the supply curve to the right 4- Prices of other products: The lack of demand for one substitute product can result in the rise of the quantity supplied of the other substitute product. For complementary products the rise in the price for one complementary product results in a rise in the supply which also increases the supply for its complementary product. (Ex: natural gas and oil) 5- Number of Suppliers: The more profitability there is in a specific industry the more likely firms are to enter that industry. Therefore an increase in the number of suppliers shifts the curve to the right. A reduction in the number of suppliers would in turn shift the curve to the left. Change in supply represents a shift in the whole supply curve (Price stays the same) Change in the quantify supplied represents a change from one point of the supply curve to another (Price may change) 3.3 Determination of Price Excess Demand: a situation in which at the given price quantity demanded exceeds quantity supplied Excess Supply: a situation in which at the given price quantity supplied exceeds quantity demanded Equilibrium Price: the price at which quantity demanded equals quantity supplied (also called market clearing price) Disequilibrium Price: a price at which quantity demanded does not equal quantity supplied Disequilibrium: a situation in a market i which there is excess demand or excess supply The excess supply can be seen by the horizontal distance between the upper part of the supply and demand curves while the excess demand can be seen by the horizontal distance in the lower part of the two curves. The equilibrium price occurs at the point of intersection of the two curves. As price goes up there is an excess supply because demand drops while supply increases. Conversely, as price of the product decreases there is an excess demand because the demand increases while the supply decreases. Excess supply causes downward pressure in price- if there is an excess supply, it pressures the price to be lowered to compensate for the excess goods Excess demand causes upward pressure in price- if there is an excess demand it would cause an increase in price due to customers being willing to pay more and sellers asking for more Comparative Statics- the derivation of predictions by analyzing the effect of a change in some exogenous variable (equilibrium price a
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