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ECONOMICS
The discussion encompasses various facets of global interdependence and economic disparities, focusing on how different countries manage and interact with foreign currencies and markets.
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many countries will have trade policies or agreements with each other these trade agreements outline what can be freely traded between the countries without any tariffs
in a perfectly competitive market a tariff decreases consumption and foreign imports while it increases domestic production and government revenues
the terms of trade represent the international price of one product in terms of another
a country should produce and export those good and services for which it is relatively more productive than another country
absolute advantage is exhibited by a nation that can supply a certain quantity of an item more efficiently than can other producers
nations are better off if they specialize in what they do best and buy the rest of what they need from others who are specialists at what they do
resource: a country’s pool of resources is the main factor affecting what it exports and imports. market size: country’s will attempt to take advantage of increasing returns to scale. climate: plays a key role in determining where some items, especially agricultural goods, are produced
canada’s primary trading partner is the us which buys over four fifths of canadian merchandise exports and provides about three quarters of canadian merchandise imports
Gains from Trade
product variety: trade facilitates the expansion of the number of products available to consumers
canada has shown a heavy reliance on trade, with exports representing 41% of its gdp
flexible exchange rates are allowed to move freely to their equilibrium levels also called floating rates
in a fixed exchange rate system the government or central bank intervenes in the currency market so that the exchange rate stays close to an exchange rate target
the exchange rate regime is the way a country manages its currency in respect to foreign currencies and the foreign exchange market
supply for canadian dollar: this is the relationship between the price of a canadian dollar and the quantity of canadian dollars supplied in exchange for another currency
demand for canadian dollar: this is the relationship between the price of a canadian dollar and the quantity of canadian dollars demanded in exchange for another currency
to see how exchange rates are set, we must look at the demand and supply of canadian currency in foreign exchange markets
any transaction that appears in the balance of payments accounts involves trading Canadian dollars for another currency
the capital and financial account have a surplus balance when there are LOWER investments by canadians in foreign markets than by foreigners in the canadian economy
the summary of all international transactions associated with current economic activity in Canada and involving canadian dollars
the connections between the Canadian economy and the rest of the world are shown in detail using canada’s balance of payments accounts
other reasons for shifts in the as curve relates to the economy’s capacity to stabilize itself in the long run, as forces push the economy toward its potential output
this is a curve that expresses the predictable inverse relationship between unemployment and inflation
inflation that occurs as increased production costs decrease aggregate supply, which then pushes up prices
inflation that occurs as increased aggregate demand pulls up prices
through selling and buying back federal bonds, the bank of canada can use deposit takers cash reserves as a lever to influence both the money supply and interest rates
conversely, during an economic boom, the bank of canada can inhibit spending and inflation by decreasing the money supply
used by the bank of canada to stimulate output and increase employment
monetary policy involves the Bank of canada changing interest rates and or altering the money supply to stabilize the economy
the moving force behind Canada’s monetary policy is the bank of canada are Canada’s central bank since 1935
money supply is a set amount determined by government decision-makers.
money demand represents the amounts of money demanded at all possible interest rates
in the economy as a whole, money is demanded for reasons related to the first two functions: a means of exchange and a store of purchasing power
measure of value: money also provides buyers and sellers with a unit of account, or a pricing standard that allows all products to be valued consistently
store of purchasing Power: provides a safe and accessible store of wealth
means of Exchange: money facilitates transactions of goods and services
in the 70s and 80s, functional finance was the guiding principle behind fiscal policy in canada since then, there have been attempts to move toward cyclically balanced budgets
some economists argue that any fiscal policy must be guided by the principle of an annually balanced budget revenues and expenditures should be equal
when a government’s revenues exceed its expenditures, there is a budget surplus when a government’s expenditures exceed its revenues, there is a budget deficit
a certain money change in government purchases or taxation does not cause the same money change in total real output Like a pebble dropped in water causes ripples, fiscal policy has a multiplier effect
with contractionary fiscal policy, governments decrease their purchases, and thus withdraw from the circular flow
with expansionary fiscal policy, governments increase their purchases, and thus raise injections into the circular flow
fiscal policy involves the use of government budget tools, spending, and taxes to influence the macroeconomy
The business cycle is the cycle of expansions and contractions in an economy
Contractions and Expansions
an expansion is usually caused by an increase in AD magnified by the reactions of both households and businesses as they spend more due to more optimistic expectations of the future
contractions is usually caused by a decrease in AD magnified by the reactions of both households and businesses, who spend less due to pessimism about the future
Arguments Against Economic Growth
opportunity cost of growth, environmental costs, and social Costs
Arguments for Economic Growth
improved living standards, social improvements, and psychological Benefits
an economy’s supply of capital resources plays a central role in enhancing economic growth by saving a higher proportion of their disposable incomes, canadians can increase net investment, which accelerates the accumulation of capital resources, which in turn pushes out the ppc and fuels economic growth
economic growth is an increase in the total output of goods and services
These cause changes in real output level at all prices - they cause a shift in the aggregate supply curve
other factors, in addition to the price level, can influence real output - known as aggregate supply factors
the aggregate supply curve is the relationship between the general price level and real output expressed on a graph
as with demand, supply can be applied to the economy as a whole it is the relationship between the general price level and real output produced in the economy known as aggregate supply
Changes in Aggregate Demand
in addition to the price level, other factors can influence total spending they are called aggregate demand factors these factors change total spending at all price levels that is they shift the aggregate demand curve
Aggregate Demand Curve
aggregate demand curve is the relationship between the general price level and total spending in the economy expressed on a graph
Aggregate Demand
demand can be applied to the economy as a whole it is the relationship between the general price level and total spending in the economy known as aggregate demand
we define the unemployment rate as the percentage of the labour force that is unemployed
Cyclical Unemployment
unemployment due to fluctuations in output and spending
Frictional Unemployment
unemployment caused by delays in matching available jobs and workers
unemployment occurs when a worker who is not currently employed is searching for a job without success
inflation is caused by increases in a nation’s money supply relative to the quantity of real goods and services in the economy
most people believe that inflation is harmful because it reduces the purchasing power of their income can buy less with their money; but remember salaries are prices too and our income increases with inflation as well
the most common concern is that the CPI overstates true inflation
to measure inflation, we first look at the most common price level the consumer price index is the measure of the price level based on the consumption patterns of a typical consumer
inflation is a general increase in the prices of goods and services in the entire economy
gdp is the total dollar value of all final goods and services produced in the economy over a given period, typically one year using current prices
macroeconomics is the study of the economy of an ENTIRE nation
wages make up 70% of household income; therefore, the factors that determine wages play an important role in income inequality
the lorenz curve is a graph showing the cumulative distribution of income among a country’s households
canadian households are ranked by income into 5 groups based on their income levels ideally each group represents 1/5 or 20% of the entire households ranking is from wealthiest to the poorest
There are two types of price controls: price floors and price ceiling. a price floor is a legal minimum price and is above the market equilibrium price and creates a surplus a price ceiling is a legal maximum price and is set below the market equilibrium price and creates a shortage
the more elastic the market supply curve is, more of the tax burden falls on the consumer the more inelastic the market supply curve is, less of the tax burden falls on the consumer
the more elastic the market demand curve is, less of the tax burden falls on the consumer the more inelastic the market demand curve is, more of the tax burden falls on the consumer
a tax on a particular good or services expressed as a dollar amount per unit of quantity
positive external effects of producing or consuming a product education is an important example, since society as a whole gains from this service is a social good because it helps canadians lead more informed, fulfilled, and productive lives
producers making products that have negative external effects focus on their private costs as they make supply decisions their prices do not cover the spillover costs
the difference between the price received from selling each unit of a product and the marginal cost of producing it the extent to which producers receive a price different than the lowest price they are willing to accept
to find a consumer’s total benefit from a product in dollar terms, you would add together all the marginal benefits of all the units consumed during a given time period
Both consumers and producers gain from participating in markets consumers through the satisfaction they gain from the products they consume producers through the profit they earn this is known as economic welfare
non-price competition refers to the efforts of imperfectly competitive firms (businesses) to increase demand for their products by swaying consumer preferences the two strategies used are product differentiation and advertising
this legislation is aimed at prevention industrial concentration and abuses of market power
while the model of the kinked demand curve is useful in clarifying profit maximization decisions for oligopolists, it cannot explain how the initial profit maximization output and price are established nor can it explain if the oligopolist market is characterized by rivalry or collusion economists have devised models known as game theory
Long Run
the competitive elements of monopolistic competition become evident in the lr because sr economic profits are being made in the restaurant industry, new businesses enter the market in the lr
Short Run
given its ability to choose price, the monopolistic competitor maximizes its sr profit by first finding the appropriate quantity of output and then using this quantity level to determine the highest possible price it can charge
due to the similarities they share, monopolistic competition and oligopoly are often lumped together in a general category known as imperfect competition
when an industry is a natural monopoly, increasing returns to scale mean that the single business can produce a product at a significantly lower cost than could several companies
given its ability to choose price, the monopolist maximizes profit by first finding the appropriate quantity of output, and then using this quantity level to determine the highest possible price it can charge
if monopolies are price makers, how do they maximize profits? they must establish both a level of output and a price when attempting to maximize profit therefore, their profit maximization is different than that of perfect competition
in the case of the oligopoly, the fact that each business makes up a considerable part of the market leads to mutual independence where the action of each business affect the other businesses
Monopolistic Competition
because it has some ability to influence the price it charges, a monopolistic competitor faces a different type of demand curve as a general rule, the demand curve for monopolistic competitors are more elastic than the demand curve for monopolists
As sole supplier of a product, a monopolist faces the same demand curve as that for the entire market - a curve with a negative slope Because of this, the monopolist has considerable ability to influence price
while perfectly competitive markets do exist, they are by no means the most common market structure markets are more likely to exhibit features of either monopoly or imperfect competition which includes both monopolistic competition and oligopoly
Marginal Cost Pricing
in the lr equilibrium, perfectly competitive businesses also practice marginal cost pricing setting the price consumers are willing as equal to MC
Minimun Cost Pricing
by operating at the break even point, where price equals minimum average cost, perfectly competitive businesses in the lr equilibrium satisfy the condition of minimum cost pricing
Benefits of Perfect Competition in the Long Run
in the lr equilibrium, perfectly competitive businesses operate at the minimum cost and marginal cost prices, thereby benefiting consumers
Perfect Competition in the Long Run
recall that a characteristic of a perfectly competitive market is ease of entry and exit this becomes a crucial factor in the long run
regardless of the market it operates in, any business can maximize its profit by following a single profit-maximizing output rule:
mr is always the same. the business’s ar and mr is also the same as it’s demand curve because the business is a price taker.
as a result of the horizontal demand curve the business faces, the perfect competitor’s total revenue is calculated by multiplying price by quantity
because a perfect competitor is a price taker, it must accept the price dictated by the market forces of demand and supply Therefore, the business’s demand curve is different than the market demand
businesses in perfectly competitive markets are price takers they are forced to take the price for their product that is set by the market forces of demand and supply
entry barriers are economic or institutional obstacles that stop potential competitors from setting up in an industry where economic profits are being made
a monopoly is in industry in which a single business supplies a product with no close substitutes and restricted entry to the industry
an oligopoly is a market in which there are only a few businesses, and entry to the industry is restricted
is the structure most prevalent in the service sector, for example the restaurant industry
is a market where both demand and supply are unobstructed - purest form of a competitive market
although there are producers (businesses) that can be either a small family business or a large corporation, each producer is one of four market structures: perfect competition, monopolistic competition, oligopoly, and monopoly
while all businesses face a saucer shaped long run average cost curve, they are not necessarily symmetrical for all industries
the concept of returns to scale is useful in analyzing the effect on a business’s costs when inputs that are fixed in the sr are now variable in the lr
continual expansion in the scale of production will eventually make a business so difficult to manage that managers will face problems in coordinating operations to ensure efficient production
usually results when making more of an item requires repeating exactly the same tasks used to produce previous units of output
a situation in which a percentage increase in all inputs causes a larger percentage increase in output increasing returns to scale are as a result of three causes: division of labour, specialized capital, and specialized management
average cost is the sum of average fixed cost and average variable cost
while marginal cost is based on changes in a business's total product, per-unit costs are expressed in terms of a single level of output.here are three types of per-unit costs: average fixed cost, average variable cost, and average cost.
marginal cost is the extra cost of producing an additional unit of output is the most important cost concept in economics!
fixed costs are economic costs for inputs that remain fixed at all quantities of output; that is regardless of the output, the business must pay these costs. variable costs are economic costs for inputs that vary at each quantity of output that is these costs increase as you produce more units of the product
in the short run, to increase production of a good a business must use MORE variable inputs
when economic costs (implicit and explicit) are subtracted from revenue, the excess is known as economic profit
productive efficiency is concerned with producing goods and/or services with the optimal combination of inputs to produce maximum output for the minimum cost
production is the process of transforming a set of resources into a good or service that has economic value
the numerical value of the price elasticity of supply is calculated similarly to the price elasticity of demand
the long run= the production period during which all of the resources required to make a product can change, and businesses may either enter or leave the industry
the short run= the production period during which at least one of the resources required to make a product cannot be varied
the immediate run= the production period during which none of the resources required to make a product can change
elastic supply is more responsive and is therefore flatter
inelastic supply is less responsive and gives a steeper curve
price elasticity of supply is the responsiveness of a producers quantities that they supply to changes in its own price
inelastic supply is supply for which a percentage change in a products price causes a smaller percentage change in quantity supplied
elastic supply is supply for which a percentage change in a products price causes a larger percentage change in quantity supplied
price elasticity can be quantified into numerical value. the larger the number, the more price sensitive it is.
some are: portion of consumer income, access to substitutes, etc
perfectly inelastic= vertical line as change in price has no impact on quantity demanded.
perfectly elastic= horizontal line as quantity demanded has no impact on price.
inelastic= straighter demand curve representing the lower price sensitivity
elastic= flatter demand curve representing the higher price sensitivity
inelastic goods have fewer substitutes and price change doesnt affect quantity demanded as much
elastic goods and services have plenty of substitues
price elasticity of demand is the responsiveness of a products quantity demanded to a change in price
when both the demand and supply shift simultaneuoulsy in any given direction so does equilibrium price and they can also move on and and one down and vice versa.
the supply factors that cause a increase or decrease in supply will also cause a shift change in equilibrium price
the demand factors that cause a increase or decrease in demand will also cause a shift change in equilibrium price
notice that if there is a shortage or a surplus, the price in a competitive market changes until equilibrium is attained. only at this point is the pressure for adjustments eliminated.
shortage is when the quantity demanded is greater than quantity supplied.
surplus is when the quantity supplied is greater than quantity demanded.
in competitive markets, demand and supply play a key role in coordinating the decisions of consumers and producers.
change in quantity supplied results from a change in the products own price and results in a movement along the supply curve.
in general terms, producers maximize their profits when they sell products at a higher price.
in a product markets, supply is related to the selling activity of businesses.
change in quality demanded results from a change in the products own price and results in movement along the demand curve
the market demand is the sum of all consumers purchases or quantity demanded at each price.
the demand curve is a graph that expresses possible combinations of prices and quantities for a product.
in general terms, consumers get more satisfaction or utility when they pay less for a product.
demand is the relationship between the various possible prices of a product and the quantities of that product consumers are willing to purchase.
all countries have economic goals that they strive for. choosing economic goals is an issue of normative economics as they require value judgements.
in a mixed economy, production decisions are made both in private markets and by government.
a command economy is a economic system in which a central government makes all the economic desicions.
a market economy is a economic system in which production and prices are determined by unrestricted competition.
in a traditional economy is an economic system in which economic decisions are made on the basis of custom.
The Production Possibility Curve is a model used by economists to illustrate the trade offs that society faces.
making a economic choice involves a trade off this is known as OPPORTUNITY COST. Opportunity cost is the utility that could have been gained by choosing and actions best alternative.
economists assume that whenever that whenever you are making an economic choice, you are trying to maximize your utility.
cause and effect includes a dependent and a independent variable
arising from the unlimited wants and limited resources,economics is the study of how to distribute limited resources to make choices and is divided into two branches, microeconomics and macroeconomics.
microeconomics: is the branch of economics that focuses on the behaviour of individual participants in various markets.
macroeconomics: is the branch of economics that takes a wide ranging view of the economy, studying the behaviour of economic sectors.
economic resources are often categorized as the natural resources, capital resources, and human resources.
human resources: is the human effort employed directly in production often referred to as labour.
capital resources: the processed materials, equipment, and buildings used in production.
natural resources: resources from nature that are used in production, like land, raw materials, and natural processes.
economics is considered as a branch of social sciences that deals in understanding the market and economy of a country.
economics is about making choices and both people and society have to face choices everyday.
wants vary from person to person, and because we face vary many choices, the sum total of wants is unlimited. our resources are limited though causing a economic problem.
