Economics: Demand, Supply, Externalities, and Market Structures

Changes in Demand & Supply

Quantity demanded/supplied changes only because the price changes leading to a movement along the curve.

Non price factors

Shifts the whole curve affecting the products demand/supply.

Demand determinants

Factors that affect the demand for a product.

Number of buyers

Quantity demanded increases no matter the price if buyers increase and vice versa for a decrease.

Income

Consumer income increases, larger demand for luxury goods, moving demand to the right.

Normal products

Products whose demand changes directly with income (luxury products/necessities) shifts to the right.

Inferior products

Products whose demand changes inversely with income (second hand clothing, no name products) shifts to the left.

Prices of other products

Substitutes: consumed in place of another product.

Substitutes

Consumed in place of another product (butter and margarine).

Complementary products

Products consumed together (cars and gas).

Consumer preferences

Current trends and fads and advertising affect people's buying patterns.

Consumer expectations

Expectations consumers have about future changes in prices and their own income affect their current purchase.

Supply determinants

Factors that affect the supply of a product.

Number of producers

More businesses in an industry means increased supply.

Resource prices

Price increase for a resource used to make a product increases costs for the business.

State of technology

Modern tech allows businesses to use efficient production methods.

Changes in nature

High temps, floods, earthquakes, early frosts can affect supply.

Prices of related products

A product's supply can be influenced by changes in the prices of other products.

Producer expectations

If producers expect the price of an item they sell to change it will affect their supply.

Taxes and subsidies

Subsidies: a benefit given by the government to producers so they produce more.

Law of Demand

There is an inverse relationship between a product's quantity demanded and its price.

Factors of Production

Natural resources, human resources, capital resources, entrepreneurship.

Natural resources

Includes soil, and the resources found above/below the earth's surface.

Labour

Includes physical labour, and the mental effort and entrepreneurship.

Capital

Refers to goods that aid in the production of other goods and services.

Positive externalities

The positive effect an activity imposes on an unrelated third party.

Negative externalities

Can arise either on production or consumption side.

Production Possibility Curve (PPC)

Shows the most efficient/max amount of output.

GDP (gross domestic product)

Measures a country's output.

Goods excluded from GDP

Non market activities, underground economy, product quality, composition of output.

Income distribution

Incomes may be distributed differently, which affects the living standards of individuals (GDP does not reflect how output is distributed among citizens).

Leisure

Leisure is a requirement for a good standard of living but it cannot be bought or sold therefore not accounted by GDP.

Environment

GDP does not differentiate between economic activities that are harmful and are not to the environment.

Real GDP

=(nominal GDP/GDP deflator(hundreths)) x 100.

Nominal GDP

Real GDP x GDP deflator.

GDP deflator

Nominal GDP/Real GDP.

CPI (Consumer Price Index)

Price of basket in current year / Price of basket in base year x 100.

Inflation rate

CPI (current year) - CPI (previous year) / CPI (previous year) x 100.

Unemployment rate

(Unemployment in labour force / labour force) x 100.

Labour force

= employed + unemployed people.

Income inelasticity

measures how consumer demand for a specific good reacts to changes in real income.

Cross price elasticity

Measurement of how much the demand for one good changes when the price of another good changes.

Perfect competition

Many buyers and sellers, no single buyer or seller is large enough to influence the prevailing price.

Standard product

Products are not distinguishable from one another.

Low barriers to entry/exit

Easy to get in and out of the market.

Monopolistic competition

Many buyers and sellers, slightly different products which can be related to location, quality or product image.

Game theory

Concerned with predicting the outcome of games of strategy in which participants have incomplete information about the others' intentions.

Fiscal policy

Used by a government of its powers of expenditure, taxation and borrowing to bring about changes to consumer demand, employment levels, inflation, and other economic goals.

Contractionary policy

When the economy is suffering from inflation, the AD is too high; government uses contractionary policy to decrease AD.

Monetary policy

Government stabilization policy that uses interest rates and money supply as its tools.

Tight money policy

Creates high interest rates and difficult availability of credit and a decrease in the money supply.

Expansionary monetary policy

A decrease in target rate encouraging chartered banks to decrease their interest rates.

Economic Goals (Income equity)

Achieved when a country's total output is distributed fairly; controversial - What is FAIR?

Price Stability

Government policymakers try to minimize the country's rate of inflation, which is a rise in the general level of prices.

Full Employment

The Canadian government endeavours to minimize involuntary unemployment in the labour force.

High Unemployment Rate

Means a lower total output than could otherwise be produced.

Balance-of-Payments

A summary of all transactions between Canada and other countries that involve exchanging Canadian dollars for other currencies.

Importance of Balance-of-Payments

It is important that Canada imports and exports roughly balance one another due to dependence on foreign markets.

Economic Growth

Helps to raise the average standard of living for Canadians.

Healthy Rate of Growth

Maintaining it in the Canadian economy will ensure that future generations achieve even higher living standards.

Economic Efficiency

Employing scarce resources in a way that derives the highest benefit.

Environmental Sustainability

Economic activity must be carried out so that the quality of our physical environment can be sustained without significant harm.

Complementary Goals

Full employment and economic growth are completely complementary goals.

Conflicting Goals

Price stability and full employment frequently clash due to government measures that bring down inflation.

Types of Unemployment

Includes frictional, structural, cyclical, and seasonal unemployment.

Frictional Unemployment

Due to being temporarily in between jobs or looking for your first job.

Structural Unemployment

Due to a mismatch between people and jobs.

Cyclical Unemployment

Due to fluctuations in output and spending (recessions and expansions).

Seasonal Unemployment

Due to the seasonal nature of some occupations and industries.

Labour Force Population

Includes Canadians 15 years or older with specific exclusions.

Participation Rate

The percentage of the labor force population which makes up the labour force itself.

Official Unemployment Rate

The number of unemployed people in the labour force as a percentage of the entire labour force.

Natural Unemployment Rate

The minimum unemployment rate resulting from real or voluntary economic forces.

Total Revenue

Price x Quantity

Profit

Total revenue - Total cost

Marginal Revenue

(Total revenue 2 - Total revenue 1) / (Quantity 2 - Quantity 1)

Marginal Cost

(Total Cost 2 - Total Cost 1) / (Quantity 2 - Quantity 1)

Profit maximizing output rule

Marginal Revenue = Marginal Cost

Perfectly competitive market

MR=D=AR=P

Break even point

When Price/Average Revenue equals Average Cost

Shut down point

When Price is equal to or less than minimum Average Variable Cost

Price elasticity

Measures the sensitivity of quantity demanded to the change in prices

Elastic demand

Demand for which a change in price causes a larger change in quantity demanded

Inelastic Demand

Demand for which a change in price causes a small change in quantity demanded

Perfectly elastic Demand

The price remains constant regardless of quantity demanded

Perfectly inelastic Demand

Quantity demanded remains constant regardless of price

Income elasticity

The responsiveness of quantity demanded to the change in consumer income

Cross-price elasticity

Responsiveness of a product's quantity demanded to change in price of another product

Price elasticity of Supply

Responsiveness of product's quantity supplied to a change in price

Elasticity of Supply

Change in a product's price causes a larger change in quantity supplied

Inelastic supply

Supply for which the change in price causes a smaller change in quantity supplied

Equilibrium

Surplus: an excess of quantity supplied over quantity demanded

Shortage

An excess of quantity demanded over quantity supplied

Macroeconomics

The study of an entire economy as a whole

Expenditure approach

Add up the total amount that is spent on all goods and services in a year

Income approach

Add up the three main income items

GNI

Gross national income (total income acquired by Canadians both within Canada and elsewhere)

Disposable income

Household income, after payment of income taxes

GDP per capita

An indicator of the change or trend in a nation's living standards over time

Contractionary monetary policy

Increases target rate to encourage charter banks to increase their interest rates