ECO105Y1 MICROECONOMICS

the result of limited time, $, and resources

the cumulation of government, individual, and business choices and interaction in markets

the best alternative given up

maximum possible amount of production with existing inputs

the ability to produce outputs at a lower absolute cost than other producers

the ability to produce outputs at a lower opportunity cost than other producers; what all arguments for freer trade are based on because of mutually beneficial gains in trade

allows traders to consume outside of their PPFs

a representation of the real world, assuming all other things are unchanged

productive resources, ex. labour, natural resources, capital equipment, and entrepreneurial ability

households sell, businesses buy

households buy, businesses sell

can be evaluated empirically by checking the facts

what you believe; cannot be fact-checked

choices that individual households/businesses/govts make and how those choices interact in markets

federal & global economic performance

1. choose only when additional benefits > additional opportunity costs
2. count only additional benefits & additional opportunity costs
3. count ALL additional benefits & costs, including implicit costs and externalities

the opportunity cost of investing your own time and money

impacts on a third party to the decision

externalities that benefit a third party

externalities that harm a third party

additional opportunity cost from the next best choice; all marginal costs are this

your wants and their intensities

consumer willingness and ability to pay

the additional benefit from a choice (ex. the diamond/water paradox)

what you plan to buy at a specific price

sum of demands of all individuals

if price increases, quantity demanded decreases

relationship between price and quantity demanded; read over and down

relationship between quantity demanded and price; read up and over

increase in consumer willingness to pay; results in right shift of demand curve

decrease in consumer willingness to pay; results in left shift of demand curve

factors that shift the demand curve

additional opportunity costs of increasing quantity supplied

marginal cost increases as supply increases; marginal benefit is measured in wages and marginal cost is the opportunity cost of time

marginal benefit decreases as quantity bought increases; marginal benefit is measured by satisfaction consumers get and marginal cost is measured in the price paid

past expenses that cannot be recovered; no influence on smart choices

businesses' ability to produce because price covers all opportunity costs of production

quantity you actually plan to supply at a given price

occurs when inputs are not equally productive in all activities

occurs when inputs are equally productive

sum of supplies of all businesses

if price increases, quantity supplied increases

shows the relationship between price and quantity supplied; read over and down

shows the minimum price businesses will accept that covers all marginal opportunity costs of production; read over and down

factors that shift the supply curve

increase in businesses' willingness to supply

decrease in businesses' willingness to supply

voluntary interactions between buyers and sellers

enforced by government for physical/financial/intellectual property

excess demand; creates pressure for prices to rise, signalling businesses to increase quantity supplied and consumers to decrease quantity demanded

excess supply; creates pressure for prices to fall, signalling businesses to decrease quantity supplied and consumers to increase quantity demanded

surpluses and shortages create incentives for this

equalizes quantity demanded and supplied

balances forces of cooperation and competition so that there is no tendency for change

creates incentives; according to Adam Smith's invisible hand theory of the miracle of markets where each person acts in their own self-interest

equilibrium price rises and quantity supplied increases

equilibrium price falls and quantity supplied falls

equilibrium price falls and quantity demanded rises

equilibrium price rises and quantity demanded falls

equilibrium price may rise/fall/remain constant; equilibrium quantity increases

equilibrium price may rise/fall/remain constant; equilibrium quantity decreases

equilibrium price rises; equilibrium quantity may rise/fall/remain constant

equilibrium price falls; equilibrium quantity may rise/fall/remain constant

comparing two equilibrium outcomes to each other to isolate the effect of changing only one factor at a time

area under the marginal benefit curve but above the market price

area under the market price but above the marginal cost curve

consumer + producer surplus

decrease in total surplus compared to an economically efficient outcome

coordinates smart choices of businesses and consumers where MB=MC

how quantity demanded changes in response to price changes

this formula is for

(Q1-Q0)/((Q1+Q0)/2) / (P1-P0)/((P1+P0)/2)

small response in quantity demanded when prices change; price increases = revenue increases; ex. demand for insulin

price elasticity of demand equals zero; quantity demanded does not respond to any price change

large response in quantity demanded when prices change; price cuts = revenue increases; ex. blue earbuds

price elasticity of demand equals infinity

factors that influence elasticity include

all money from sales (price per unit x quantity sold)

this causes elasticity to go from elastic, to unit elastic, to unit elastic

measures how much quantity supplied responds to price changes

small response in quantity supplied when price rises; value for formula is NEGATIVE

elasticity equals zero

large response in quantity supplied when price rises

price elasticity equals infinity

factors that influence elasticity of supply include

responsiveness of the demand for a product/service to a change in price of a substitute or complement; positive for substitutes, negative for complements

responsiveness of the demand for things as income changes

income elasticity of demand is __________ for normal goods

income elasticity of demand is __________ for inferior goods

income elasticity is greater than 0 but less than 1; normal goods that are necessities

income elasticity is greater than 1; normal goods that are luxuries

division of tax between buyers and sellers

with perfectly inelastic demand, _______ pay all tax

with perfectly elastic demand, _______ pay all tax

with perfectly elastic supply, _______ pay all tax

with perfectly inelastic supply, _______ pay all tax

government receives ________________ when taxing products and services with inelastic demands and supplies

shortages develop; quantity sold = quantity supplied only = frustrated buyers

surpluses develop; quantity sold = quantity demanded only = frustrated sellers

maximum price set by govt; ex. rent controls

take from the rich, give to the poor; justification for price ceilings

cause the following unintended consequences:
housing shortages, well-off tenants subsidized, inefficiency

minimum price set by government; ex. minimum wage laws

estimated to be ~$20/hour

cause the following unintended consequences:
quantity of labour supplied exceeds quantity of labour demanded, creating unemployment, inefficiency, and reduction of total surplus

when gains from workers who remain employed after the wage increases exceed losses of incomes of workers who lose their jobs

alternative policies to the working poor that don't sacrifice market flexibility include

politicians on the _______ prefer equitable outcomes

politicians on the _______ prefer efficient outcomes or equal opportunities

obvious costs; costs a business pays directly

decrease in value of equipment over time; can be calculated using price/# of years of use it has

revenues - obvious costs (including depreciation)

hidden opportunity costs of what a business owner could earn elsewhere with the time and money invested

compensation for owner's time and money; sum of hidden opportunity costs (implicit costs); average profits in other industries

revenues - all opportunity costs
revenues - (obvious costs + hidden opportunity costs)
revenues - (obvious costs + implicit costs)
revenues - (obvious costs + normal profits)
businesses enter the industry, supply increases, price falls until prices cover costs and economic profits = $0

negative economic profits causing businesses to leave the industry, supply to decrease, and prices to increase until prices cover costs and economic profits = $0

earning normal profits; at equilibrium; no tendency for change

quantity demanded = quantity supplied, but economic profits or losses lead to changes in supply

quantity demanded = quantity supplied, economic profits are zero, and there is no tendency for change

one seller, no close substitutes, demand curve is steep and inelastic

businesses' ability to set prices

monopoly with maximum ability to set prices

many sellers producing identical outputs; demand curve is horizontal and perfectly elastic at market price

business with no power to set prices

characteristics that affect competition and pricing, ex. substitutes, competitors, and barriers to entry

attempt to distinguish from competitors

legal or economic barriers preventing new competitors from entering the market; ex. patents and copyrights give businesses short-term monopoly power

an example of an economic barrier; average total cost of producing decreases as quantity of production increases

total cost per unit of output

few big sellers control most of the market

many small businesses make similar but slightly differentiated products and services

active attempt to increase profits & gain market power of monopoly
examples include:
cutting costs, improving quality & innovation, building barriers to entry

competitive businesses generate economic profits for winners and improve living standards for all, but destroy less productive/desirable products

unintended consequence of competitive actions; up and down fluctuations of overall economic activity

additional revenue from selling one more unit

marginal revenue is _______ price for price-taking businesses in perfect competition

marginal revenue is _______ price for price-making businesses in structures other than perfect competition

products easily resold tend to have a single price in the market
the reason why marginal revenue < price for price-makers

as output increases, decreasing productivity increases marginal costs; businesses operating near capacity have increasing marginal costs to increase output and businesses not operating near capacity have constant marginal costs to increase their output

increased quantity = increased profits IF marginal revenue > marginal costs

quantity with maximum economic profits; intersection of MR & MC curves

do not change with quantity of output produced

charging different customers different prices for the same product or service; only possible when a business can prevent resale and control resentment; increases profitd

when markets have inefficient or inequitable outcomes

extreme result of economies of scale; an example of market failure

publicly owned businesses in Canada

sets a price allowing the regulated monopoly to just cover average total costs, including normal profits

mathematical tool for understanding how players make decisions taking into account what they expect others to do

two players must make a strategic choice where the results of the game depend on the other player's choice; both players would be better off if they cooperated but both are motivated to cheat

outcome of a game where each player makes their own best choice given the choices of others; smart choices based on trust

conspiracy to cheat others

association of suppliers maintaining high prices and restricting competition; ex. opec

prevents anti-competitive behaviour and raises costs to businesses for price fixing

price fixing, bid rigging, false/misleading advertisement

mergers, abusing dominant market positions, lessening competition

buyer beware

the view that government intervention eliminates waste and achieves efficiency

the view that government intervention benefits regulated businesses, not public interest

when regulations fail to serve public interest; sometimes market outcome (even with monopoly power) is better than government regulation

overuse and depletion of a public resource

people who consume goods/services without paying

balance between additional environmental benefits of lower pollution and additional opportunity costs of reduced living standards

intersection of marginal private benefit and marginal private cost curves determines

smart choice for any product/service that generates an externality

marginal private cost plus marginal external cost

marginal private benefit plus marginal external benefit

price of preventing/cleaning up damage to others

price of value/savings to others

tax to pay for external costs of emissions (internalize externalities)

an emissions tax on carbon-based fossil fuels

limits quantities of emissions; involves auctioning off permits to polluters

provide external benefits consumed simultaneously by everyone

examples of public goods (remember, cohen is american)

markets underproduce products and services with positive externalities, resulting in this problem

the intersection of marginal social benefit and marginal social cost curves produces the smart social quantity of outputs with

payment to those who create positive externalities

equal to marginal external benefit of savings to others associated with an activity

government provision of products or services with positive externalities, financed by tax revenue

amount per unit of time; a flow

total value of assets owned; a stock

payment for labour

payment for capital

payment for land

payment for entrepreneurs

demand for output and profits businesses can derive from hiring labour

additional output from hiring one more unit of labour

when more labourers are hired, the marginal product of the variable input eventually diminishes

additional revenue from selling output produced by an additional labourer

the amount that, if invested today, will grow as large as the future amount, taking account of earned interest

reduction of future revenues for foregone interest

investing when the present value of the stream of future earnings is greater than the price of the investment is a _____________________________

income paid to any input in inelastic supply, ex. land and sports stars

for inputs like land in inelastic supply, prices are determined exclusively by

"what are you worth?" is a ______________ question

"what should you be worth?" is a ________________ question

caused by not owning labour skills or assets that the market values, or from not getting a high enough price for what you do have

policy options to reduce inequality and poverty include

increased earning potential from work experience, on-the-job training, education

tax rate increases as income increases

tax rate decreases as income increases

another word for proportional taxes; tax rate is the same regardless of income

taxes on additional dollar of income

payments by governments to households

due to incentive effects, "a more equally shared pie may be __________"