ECONOMICS

Unit 2: Firms, Markets, and Economic Stakeholders

Topic 1: Production in the Short Run

Production

production is the process of transforming a set of resources into a good or service that has economic value

Productive efficiency

productive efficiency is concerned with producing goods and/or services with the optimal combination of inputs to produce maximum output for the minimum cost

Economic Costs and Economic Profit

when economic costs (implicit and explicit) are subtracted from revenue, the excess is known as economic profit

Production in the Short Run

in the short run, to increase production of a good a business must use MORE variable inputs

Topic 2: Costs in the Short Run

Fixed, Variable and Total Costs

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

Marginal Costs

marginal cost is the extra cost of producing an additional unit of output is the most important cost concept in economics!

Per-Unit Costs

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.

Average Costs

average cost is the sum of average fixed cost and average variable cost

Topic 3: Production and Costs in the Long Run

Increasing Returns to Scale

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

Constant Returns to Scale

usually results when making more of an item requires repeating exactly the same tasks used to produce previous units of output

Decreasing Returns to Scale

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

Returns to Scale and Long Run Costs

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

Long Run Average Cost

while all businesses face a saucer shaped long run average cost curve, they are not necessarily symmetrical for all industries

Industry Differences

while all businesses face a saucer shaped long run average cost curve, they are not necessarily symmetrical for all industries

Topic 4: Market Structures

Market Structures

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

Perfect Competition

is a market where both demand and supply are unobstructed - purest form of a competitive market

Monopolistic Competition

is the structure most prevalent in the service sector, for example the restaurant industry

Oligopoly

an oligopoly is a market in which there are only a few businesses, and entry to the industry is restricted

Monopoly

a monopoly is in industry in which a single business supplies a product with no close substitutes and restricted entry to the industry

Entry Barriers

entry barriers are economic or institutional obstacles that stop potential competitors from setting up in an industry where economic profits are being made

Market Power

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

Topic 5: Perfect Competition in the Short Run

Business’s Demand Curves - Perfect Competition

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

Revenue Conditions

as a result of the horizontal demand curve the business faces, the perfect competitor’s total revenue is calculated by multiplying price by quantity

Relationship between Revenue and Demand

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.

Profit Maximization

regardless of the market it operates in, any business can maximize its profit by following a single profit-maximizing output rule:

Topic 6: Perfect Competition in the Long Run

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

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

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

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

Topic 7: Demand Differences and Monopolies

Demand Differences

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

Overview of Monopoly, Monopolistic Competition and Oligopoly

Monopoly

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

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

Oligopoly

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

Monopoly

Revenue Conditions

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

Profit Maximization

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

Regulation of Monopolies

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

Topic 8: Imperfect Competiton

Imperfect Competition

due to the similarities they share, monopolistic competition and oligopoly are often lumped together in a general category known as imperfect competition

Monopolistic Competition and its Revenues and Profits in the Short Run and Long Run

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

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

Game Theory

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

Topic 9: Traits of Imperfect Competition

Anti-Combines Legislation in Canada

this legislation is aimed at prevention industrial concentration and abuses of market power

Traits of Imperfect Competition

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

Topic 10: Economic Welfare and Spillover Effetcs

Economic Welfare

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

Marginal and Total Benefit

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

Producer Surplus

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

Spillover Costs

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

Spillover Benefits

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

Topic 11: Excise Taxes and Price Controls

What are excise taxes?

a tax on a particular good or services expressed as a dollar amount per unit of quantity

The Effect of Price Elasticity of Demand

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

The Effect of Price Elasticity of Supply

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

Price Controls

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

Topic 12: The Distribution of Income

Income Shares

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

Lorenz Curve

the lorenz curve is a graph showing the cumulative distribution of income among a country’s households

Income Inequality-Wages

wages make up 70% of household income; therefore, the factors that determine wages play an important role in income inequality

Unit 3: Macroeconomics

Topic 1: Gross Domestic Product

Macroeconomics: What is it?

macroeconomics is the study of the economy of an ENTIRE nation

Gross Domestic Product

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

Topic 2: Inflation

Inflation: What is it?

inflation is a general increase in the prices of goods and services in the entire economy

Measuring 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

Limitations of Consumer Price Index

the most common concern is that the CPI overstates true inflation

Problems Caused by Inflation

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

What Causes Inflation?

inflation is caused by increases in a nation’s money supply relative to the quantity of real goods and services in the economy

Topic 3: Unemployment

Unemployment What is it?

unemployment occurs when a worker who is not currently employed is searching for a job without success

Types of Unemployment

Frictional Unemployment

unemployment caused by delays in matching available jobs and workers

Cyclical Unemployment

unemployment due to fluctuations in output and spending

Unemployment Rate

we define the unemployment rate as the percentage of the labour force that is unemployed

Topic 4: Aggregate Demand

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

Aggregate Demand Curve

aggregate demand curve is the relationship between the general price level and total spending in the economy expressed on a graph

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

Topic 5: Aggregate Supply and Market Equilibrium

Aggregate Supply

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

Aggregate Supply Curve

the aggregate supply curve is the relationship between the general price level and real output expressed on a graph

Changes in Aggregate Supply

other factors, in addition to the price level, can influence real output - known as aggregate supply factors

These cause changes in real output level at all prices - they cause a shift in the aggregate supply curve

Topic 6: Economic Growth and the Business Cycle

Economic Growth

economic growth is an increase in the total output of goods and services

Economic Growth & Productivity

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

Debate Over Economic Growth

Arguments for Economic Growth

improved living standards, social improvements, and psychological Benefits

Arguments Against Economic Growth

opportunity cost of growth, environmental costs, and social Costs

Business Cycles

The business cycle is the cycle of expansions and contractions in an economy

Contractions and Expansions

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

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

Topic 7: Fiscal Policy

Fiscal Policy: What is it?

fiscal policy involves the use of government budget tools, spending, and taxes to influence the macroeconomy

Expansionary Fiscal Policy

with expansionary fiscal policy, governments increase their purchases, and thus raise injections into the circular flow

Contractionary Fiscal Policy

with contractionary fiscal policy, governments decrease their purchases, and thus withdraw from the circular flow

Multiplier Effect

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

Topic 8: Impact of Fiscal Policy

Fiscal Policy - Surpluses and Deficits

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

Fiscal Policy Guidelines

some economists argue that any fiscal policy must be guided by the principle of an annually balanced budget revenues and expenditures should be equal

Recent Fiscal Policy

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

Topic 9: Money

Functions of Money

means of Exchange: money facilitates transactions of goods and services

store of purchasing Power: provides a safe and accessible store of wealth

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

The Money Market

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

Demand and Supply of Money

money demand represents the amounts of money demanded at all possible interest
rates

money supply is a set amount determined by government decision-makers.

Topic 10: Monetary Policy

The Bank of Canada

the moving force behind Canada’s monetary policy is the bank of canada are Canada’s central bank since 1935

Monetary Policy

monetary policy involves the Bank of canada changing interest rates and or altering the money supply to stabilize the economy

Expansionary Monetary Policy

used by the bank of canada to stimulate output and increase employment

Contractionary Monetary Policy

conversely, during an economic boom, the bank of canada can inhibit spending and inflation by decreasing the money supply

Tools of Monetary Policy

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

Topic 11: Impact of Monetary Policy on Inflation and Unemployment

Demand Pull Infltion

inflation that occurs as increased aggregate demand pulls up prices

Cost Push Inflation

inflation that occurs as increased production costs decrease aggregate supply, which then pushes up prices

The Phillips Curve

this is a curve that expresses the predictable inverse relationship between unemployment and inflation

Self Stabilizing Economy

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

Unit 4: Global Interdependence and Inequalities

Topic 1: Balance of Payments

The Balance of Payments

the connections between the Canadian economy and the rest of the world are shown in detail using canada’s balance of payments accounts

Current Account

the summary of all international transactions associated with current economic activity in Canada and involving canadian dollars

The Capital and Financial Account

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

Topic 2: Exchange Rates

Exchange Rates

any transaction that appears in the balance of payments accounts involves trading Canadian dollars for another currency

Foreign Exchange Markets

to see how exchange rates are set, we must look at the demand and supply of canadian currency in foreign exchange markets

Changes in Demand and Supply Canadian Dollar

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

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

Topic 3: Exchange Rate Systems

Exchange Rate Regimes

the exchange rate regime is the way a country manages its currency in respect to foreign currencies and the foreign exchange market

Fixed Exchange 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

Flexible Exchange Rates

flexible exchange rates are allowed to move freely to their equilibrium levels also called floating rates

Topic 4: The Case for Trade

Importance of Trade

canada has shown a heavy reliance on trade, with exports representing 41% of its gdp

Canada’s Trade Partners

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

What is Traded?

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

Topic 5: Absolute and Comparative Advantage

International Trade

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

Absolute Advantage

absolute advantage is exhibited by a nation that can supply a certain quantity of an item more efficiently than can other producers

Comparative Advantage

a country should produce and export those good and services for which it is relatively more productive than another country

Topic 6: Trade Protection and Trade Policies

Terms of Trade

the terms of trade represent the international price of one product in terms of another

Trade Protection

in a perfectly competitive market a tariff decreases consumption and foreign imports while it increases domestic production and government revenues

Trade Policies

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