Microeconomics Notes

Lecture 0
-​ Understand the scarcity of money and resources
-​ Understand the framework of economics
-​ Cost benefit principle
-​ Opportunity cost principle
-​ Marginal principle
-​ Independence principle
-​ What do they study
-​ GDP per capita
-​ Wealth of the average person in a community
-​ Will learn the meaning behind headlines
-​ Headlines stay from predicted models
-​ Why does beyonce’s concert cause inflation but taylor swift's helps
the economy
-​ Involves health and demographics
-​ Example: men who are poor die young then rich men, women same
thing but to a lesser extent
-​ Immigration
-​ GDP

-​ Micro VS macro
-​ Micro; study of individuals, households and firms
-​ Macro; study of aggregated economic outcomes like inflation,
unemployment and growth
Lecture 1: Core Principles

-​ Economics can be summed up into 4 principles

-​ The cost benefit principle
-​ Pursue option whose benefits are at least as large as the cost
-​ The opportunity cost principle
-​ Consider the next best alternative you had to give up
-​ The marginal principle
-​ incremental
-​ The independence principle
-​ Other choices, other people's choices, other markets, expectation
-​ The cost benefit principle
-​ Cost and benefits are incentives that shape your decisions
-​ Evaluate full costs and benefits of every choice
-​ Are benefits greater or equal to costs
-​ Total benefits vs total costs
-​ Pursue whichever decision is worth the cost
-​ Framing effects
-​ If something says on sale, looks like you have to buy it because it
appears to be cheaper
-​ Quantifying costs and benefits
-​ Convert costs and benefits into dollars by evaluating your
willingness to pay
-​ Interpreting the data
-​ If you deem that paying for something that makes you happy, then
you should
-​ Maximizing economic surplus
-​ When following this principle, every decision will yield larger
benefits than costs
-​ If buying a coffee for someone else gives you $4 worth of
happiness’ and the coffee only costs $3, then that's $1 of
surplus
-​ Coffee stores now also benefit as they are making $2 if the
coffee costs them $1 to make
-​ Example: biking to work, alternative = driving

Cost Benefit

Risk (rain) → taking the bus Exercise → alternative: cycling

Time → extra 2 mins/trip x 40 trips class → $6/trip x40 trips = $240 a
 and 1.80/min (pay) = $144 a month month
comfort? No gas = $30/month
Parking = $45 a month
Owning a bike = sunk costs (gonna Comfort?
own it regardless)
Owning a car = sunk cost
-​
-​ The opportunity cost principle
-​ Reflects scarcity
-​ There is not an unlimited supply of everything (time included)
-​ The opportunity cost of something is the next best alternative you have to
give up
-​ Makes you focus more on tradeoffs
-​ Calculating opportunity cost
-​ Focus on salary, potential salary, tuition etc
-​ The what if trick
-​ When faced with a decision, evaluate the two possible outcomes
-​ Sunk costs
-​ Time, effort, and other costs put into a project are referred to as
sunk costs and should not be evaluated when talking about
opportunity costs as those cannot be avoided

-​ The marginal principle

-​ States that the best decisions are made incrementally
-​ Marginal benefit are the benefits from one extra unit of something
-​ Used when deciding how many rather than either or
-​ When the marginal benefits start becoming less then the marginal cost,
stop
-​ Rational rule states keep going until the two equal each other
-​ If marginal benefit exceeds marginal cost, raises economic surplus
-​ Same vice versa
-​ The independence principle
-​ Your best choice relies on your other choices, choices others make,
developments in other markets and expectations about the future
-​ Must focus on
-​ Dependencies between each of your individual choices
-​ Dependencies between people or businesses in the same
market
-​ Dependencies between markets
-​ Dependencies through time
Chapter 2: Demand

-​ Formula for percentage increase or decrease

-​ (x - y)/Y
-​ (125-100)/100
-​ Caveats of the housing market
-​ Is housing a really a competitive market
-​ There are trends, sometimes people
sell and buy more sometimes less
-​ People are complicated
-​ There are attachments to where you live
-​ Models offer simpler frameworks, can be useful
-​ Individual demand curve
-​ Plots the quantity of an item at each price
-​ Price goes on y, quantity goes on x
-​ As price goes down, you are willing to buy more items
-​ Your decision and your demand curve
-​ Give something a dollar value, asses the benefits
-​ Focus on marginal benefits
-​ Rational rule for buyers
-​ Buy more of an item if the marginal benefit is larger than the
marginal cost
-​ Buy until price = marginal benefits
-​ Interdependence rule for buyers
-​ Decision on your demand curve depends on your need for other
stuff
-​ Example: how many groceries are you buying depends on
how much you like to cook, the price of groceries, how much
time you have that week, are their any good alternatives for
food around you
-​ Demand curves reveals marginal benefits
-​ As prices increase, the least likely you are to buy more of that
product
-​ Market demand
-​ Analyzing the whole market for one specific item
-​ Market demand curve
-​ Total quantity of an item at each price
 -​ How to create a demand chart
-​ Find out how much each person is willing to spend at each quantity
-​ Then add the total quantity demanded by the customers
-​ Then scale up the quantities (if a survey was for 300 people and
wanted info for a 30 000 person town simply multiply by 100)
-​ Plot the total quantities demanded for each price
-​ When analyzing market demand, must remember that changing price
changes who your customers are
-​ Price changes causes fixed movements along the curve
-​ Shifting market demand curves
-​ Based off of interdependence principles
-​ Rightward shift indicates increase in demand whereas leftward indicates
decrease
-​ Shift relies on 6 factors
-​ Income
-​ Quantity of goods relies on income
-​ Normal good
-​ A item at which comes at higher demand when at a
higher income
-​ When income raises, more likely to eat steak
-​ Inferior good
-​ An item that decreases demand when at a higher
income
-​ When income raises, less likely to eat KD
-​ Preferences
-​ Your needs shift over time
-​ When you become a parent, demand for diapers go up but
going out money goes down
-​ Prices of related goods
-​ Complementary goods
-​ When demand for one good decreases because the
price of a related good increases
-​ Cheaper cars leads to more people driving,
raising the demand for gas
-​ Substitute goods
-​ Choices depend on best price in the market
-​ Beef prices go up, maybe spend on
chicken
-​ Expectation
 -​ If the expectation that a price is going to raise, you decide
whether to purchase or not
-​
-​ Congestion and network events
-​ Network effect
-​ When a good becomes popular because other people
use it
-​ Congestion effect
-​ When a good becomes popular so your demand goes
down
-​ The type and number of buyers (only affects market demand)
-​ Shaped by the type and number of buyers at the time
-​ During the baby boom, baby clothes raised in
popularity, then school books etc

Chapter 3
-​ What you sell at each price
-​ Individual supply curve
-​ A graph plotting the quantity of a item that a business plans to sell
-​ Holds things constant
-​ Upward sloping
-​ Marginal costs increase as price goes up
-​ Each extra cost of the good is costing more to make
-​ Each additional worker is less productive
-​ Not a law
-​ Some low prices there will not be production
-​ Curves won't necessarily make it to the y axis
-​ Fixed costs not included in marginal cost
-​ Law of supply
-​ The tendency for the quantity supplied to be higher when the price
is higher
-​ Perfect competition/competitive markets
-​ All businesses sell an identical good
-​ Many sellers and many buyers, each of whom are smaller relative
to the market
-​ Gasoline industry
-​ Prices are similar
-​ If higher than customers go elsewhere
-​ If lower losing money
-​ Makes them price takers
 -​ Someone who changes the prevailing price and
whose actions does not affect the prevailing price
-​ Use core 4 principles to your supply decisions
-​ Marginal cost
-​ One more?
-​ Cost benefit
-​ Cost to make one more vs price you can sell it at
-​ Opportunity cost
-​ Owner could use time elsewhere
-​ Interdependence
-​ We are holding all else constant
-​ Rational rule
-​ Price could receive > marginal cost to produce
-​

-​
-​ Rational rule for selling
-​ Sell one more item if the price is greater or equal to the marginal
cost
-​ Supply curve reveals marginal cost
-​ Marginal product
-​ Increase in output from an increase in input
-​ Substitute products
-​ Two goods that compete against each other
-​ Complement goods
-​ Two goods that are required each other to thrive
-​ Diminishing marginal product
-​ Marginal product of input declines as you use more of that input
-​ Market supply curve
-​ Plots total market supply for specific item
-​ Take quantity supplied and multiply by # of sellers in that
market
-​ Reasons for upward curve
-​ High price leads to more products being produced
-​ More businesses supply the good at a high price
 -​ A change in price causes a movement along the supply curve and a
change in quantity supplied
-​ A shift in the supply curve is based off of the interdependence principle
-​ Due to input prices
-​ Businesses productivity
-​ Prices of related outputs
-​ Supply would decrease if the substitute in production
increases
-​ Expectation
-​ Type and number or sellers
-​ Movements are caused by either price or supply, shifts are due to outside
factors
-​ Quantity supplied
-​ Indicates a movement along the line
-​ Supply
-​ Indicates a shift in the axis

Chapter 4
-​ Planned economies
-​ Cuba, soviet union
-​ Decisions are made by one entity
-​ Market economies
-​ North america, europe
-​ Each individual makes its own economic decisions
-​ Goods, services, labor, marriage
-​ Market
-​ A setting bringing together buyers and sellers
-​ Markets are everywhere, not just with prices
-​ Elections, there are a select number of votes, you supply your vote
-​ Different ways buyers and sellers meet
-​ Each time, the price is determined by supply and demand
-​ Equilibrium
-​ A point of no forces to change
-​ Resulting price and quantity is called equilibrium price and quantity
-​ Essentially represents both supply and demand
-​ Price such that the quantity demanded = quantity supplied
-​ Shortages lead prices to rise
-​ If price is too low, the demand for it will be greater than sustainable,
leading to a shortage leading the price to go up
-​ Surplus causes prices to fall
 -​ Demand to low, prices lower and demand rises
-​ If prices don't change, that prices is at equilibrium
-​ Shifts in demand
-​ Summarize peoples buying plans
-​ Increase leads to higher prices and larger quantities
-​ Steps to determine real life business issues
-​ Step one, is it supply curve, demand curve, or both shifting
-​ Step two, is it an increase or decrease
-​ Step three, how will the prices change at a new equilibrium

Chapter 5

Elasticity
-​ Price of elasticity demand
-​ Measuring how responsive buyers are to price changes
-​ Specifically in response to a 1% change
-​ Price elasticity = percent change in quantity demand/percentage change
in price
-​ Absolute value focuses on magnitude of the price elasticity demand
-​ When quantity is very responsive demand is elastic
-​ Elastic​ curves are flatter than inelastic curves
-​ Why does elasticity matter
-​ Optimal pricing strategies for companies
-​ Tax policies
-​ What happens if raise taxes for the rich
-​ Environmental policy
-​ International issues
-​ Why are food prices so expensive
-​ All depend on price elasticity of demand/supply
-​ Calculating elasticity
-​ (Q1, P1) (Q2, P2)
-​ Change in demand
-​ (Q2-Q1)/((Q2+Q1)/2)
-​ Price
-​ (P2-P1)/((P2+P1)/2)
-​ Price of elasticity in demand
-​ Change in demand/change in price
-​ (Q2-Q1)/((Q2+Q1)/2) / (P2-P1)/((P2+P1)/2)
-​ Substitutability
-​ Necessities versus luxuries
 -​ Competing products
-​ Definition of the market
-​ Rice is a substitute for wheat
-​ Time horizon
-​ Alternatives may take time to exploit
-​ Total revenue
-​ Price x quantity

Chapter 6

Government intervention
-​ Function of government
-​ Monopoly on use of force
-​ Define and enforce property rights
-​ Taxes
-​ When some $ amount is paid to a government by consumers, government
takes some
-​ Some examples
-​ HST, PST, GST, VAT
-​ Fuel tax
-​ Income tax
-​ CPP premiums (income tax)
-​ User fees, regulatory chargers (Transit, dog license)
-​ A tax on buyers
-​ Taxing something when purchased
-​ Shifts demand curve
-​ Leads to decline in quantities sold
-​ Both buyers and sellers bear the burden of taxes
-​ Statutory burden
-​ Government assigning you a tax
-​ Economic tax
-​ Burden by after tax sales
-​ Tax incidence
-​ Division of economic burden between buyers and sellers
-​ Tax on sellers
-​ Shifts supply curve
-​ Increase price buyers pay and decreases amount received
-​ Same economic effect
-​ How to evaluate taxes
-​ Is it supply or demand shifting
 -​ Increase or decrease in taxes
-​ How new prices affect equilibrium
-​ Consider if demand or supply is more elastic
-​ Price regulations
-​ Price ceiling
-​ Max price by government
-​ Price floor
-​ Lowest price by government
-​ Binding price ceiling
-​ Price is set below equilibrium
-​ Binding price floor
-​ Price is set above equilibrium
-​ Quality regulations
-​ Minimum or maximum quantity that a good can be sold at
-​ Mandate
-​ Requirement to buy or sell a good
-​ Quota
-​ Maximum of a good that can be sold

Market efficiency/failure
-​ Positive analysis
-​ Analyzing what will happen
-​ Normative analysis
-​ Analyzing what should happen
-​ Economic welfare
-​ Well-being
-​ Economic Efficiency
-​ Details that the more surplus, the more efficient
-​ Equity
-​ Results in fairer distribution and outcome
-​ Consumer surplus = marginal benefit - price
-​ Producer surplus = price - marginal cost
-​ Economic surplus = consumer surplus + producers
surplus
-​ = marginal benefit - marginal cost
-​ Efficient production
-​ Producing a good at the lowest possible cost
-​ Efficient allocation
-​ Allocating goods to create the largest economic surplus
-​ Efficient quantity
 -​ Quantity that produces largest possible economic surplus
-​ Rational rule for markets
-​ Marginal benefit = marginal cost
-​ Market failure
-​ When forces of supply and demand lead to inefficient outcomes
-​ Deadweight loss
-​ How far surplus falls behind efficient outcome
-​ Government failure
-​ When policies lead to bad outcomes
-​ Distribution consequences ​
-​ Who gets what
-​ When markets fail to be efficient
-​ Tools we need to evaluate public policy
-​ Demand graphs
-​ Triangle in graph = surplus
-​ Rectangle = total cost paid
-​ Supply
-​ Rectangle = revenue
-​ Triangle = producers surplus
-​ Everything else within rectangle = total cost
-​ Efficiency
-​ In a competitive market, we take prices as given
-​ Efficient production
-​ There are many firms in a market, who should make
the next pizza
-​ Efficient allocation
-​ There are many consumers in a market, who should get the next pizza
-​ Competitive firms
-​ Same marginal cost = price
-​ Underproduction
-​ Deadweight loss
-​ All lost economic surplus
-​ Representing what could've had
-​ Overproduction
-​ Deadweight loss
-​ Happens from pushing further from equilibrium

Chapter 8

-​ Gains from trade

 -​ Benefits from relocating goods and services to better uses
-​ Opportunity cost
-​ Determine who has the lower opportunity cost of each thing
-​ Comparative advantage
-​ The ability to do a task at a lower opportunity cost
-​ All about opportunity cost
-​ Absolute advantage
-​ Ability to do a task using fewer inputs
-​ Steps to identifying who has a comparative advantage
-​ 1. Determine how long each task would take
-​ 2. Convert into a measure of opportunity cost
-​ OC of what you want to determine/what you would be giving
up
-​ OC of cheesecake = cheesecake/lasagna
-​ 3. Evaluate who can produce the
most goods at the lowest
opportunity cost
-​ Production possibilities frontier
-​ Indicates OC at each level
-​ The flatter the curve, the less
efficient
-​ Prices as signals, incentives, information
-​ Price changes indicate buying trends
-​ Prices incentivise suppliers to produce more
-​ Display how to interpret markets
-​ Market predictions
-​ Markets whose payoff is linked to whether an uncertain
event occurs
-​ Internal markets
-​ Markets within a company that has to buy and sell resources

New chapter
International trade
-​ Sources of comparative advantage
-​ Climate
-​ Human capital
-​ Other acquired comparative advantage
-​ Law of one price
-​ For goods that are traded internationally, prices need to be similar
-​ If not, opportunity for arbitrage
-​ Finding ways to acquired cheaper goods
and sell them to areas with a higher price
-​ Autarky
-​ Self sufficient societies
-​ Consumer surplus comes at the cost of producer surplus
and same vice versa
-​ CALCULATE THE TRIANGLE
-​ Producer surplus bottom triangle
-​ Consumer surplus top triangle
-​ Answers to iclicker
-​ A + B = consumer surplus
-​ G + C = producer surplus
-​ B = economic surplus
-​ E = government revenues
-​ D + F = deadweight loss
-​ Import
-​ Goods or services from
foreign sellers
-​ Export
-​ Goods or services provided to
foreign buyers
-​ Trade costs
-​ Extra costs from
buying/selling internationally
-​ World price
-​ The price that a product sells
for in the global market
-​ Domestic demand/supply curve
-​ demand/supply that's domestic
-​ Arguments for limiting trade
-​ National security requires country to make own goods
-​ Protection helps infant companies grow
-​ Anti dumping laws prevent unfair competition
-​ Trades shouldnt be a way to skirt regulations
-​ Must meet standards
-​ Foreign competition may lead to unemployment
-​ Tariffs
 -​ Tax on imported goods
-​ Lead to smaller consumer surplus
-​ Lead to larger producer surplus
-​ Import quota
-​ Limit on quantity of good imported
-​ Globalization
-​ Increased integration within different regions

Chapter 10
-​ When markets work well
-​ At total equilibrium
-​ Negative externalities
-​ Cost on a party from an indirect decisions from another party
-​ Producing more clothes ruins the environment
-​ Mec (marginal external cost)
-​ Damage caused by every extra unit
-​ Mpc (marginal private cost)
-​ Change in producers total cost from every good made
-​ Private good
-​ Cookies, cars
-​ Excludable and rivals
-​ Common resources
-​ Fish, town commons
-​ Nonexcludable, rivals
-​ Club good
-​ Cable tv, toll road
-​ Nonrival and excludable
-​ Public good
-​ Defense, scientific research
-​ Nonrival, nonexcludable
-​ Coase theorem
-​ Describes the proper costs and underlying values of an issue that will be
discussed to achieve efficiency
-​ External costs
-​ Costs that are not for the person make the decision
-​ External benefits
-​ Benefits received by not their persona making the decision
-​ Nonrival good
-​ Something that can be possessed by everyone
-​ Cap and trade
 -​ Process of selling excess necessities
-​ Cap on amount of pollution, sell your share
-​ Corrective tax
-​ Process of taxing something to get it to social equilibrium
-​ Something you have to do
-​ Corrective subsidy
-​ Process of rewarding or encouraging something to get it to social
equilibrium
-​ Something you don't have to do
-​ Positive externality
-​ Externality fills in benefits to a third party
-​ Negative externality
-​ Externality fills in costs to a third party
-​ Finding out how much the government should subsidies
-​ Move dot along axis to a line with other dot, find out difference

SOS session
-​ Scarcity
-​ Human desires are unlimited, resource are limited
-​ Essentially study of scarcity, assumption of rationality
-​ Resources
-​ Land
-​ Labour
-​ Capital
-​ Production and consumption
-​ Productions
-​ Goods are tangible
-​ Services and intangible
-​ Choice and costs
-​ As resources are scare, people make choices between alternatives
-​ Opportunity cost
-​ What you sacrifices by making a decision
-​ Total = total gains - losses
-​ Production possibilities frontier
-​ Option on the frontier are possible
-​ Inside are inefficient
-​ Outside impossible
-​ Possible to shift with more efficient or less efficient equipment
-​ Positive vs normative statement
-​ Positive
 -​ House the world is
-​ Normative
-​ How it should be
-​ Demand vs quantity demanded
-​ Quantity demanded
-​ Amount of good or service that consumers want to purchase at
given a price
-​ Demand
-​ Does not change with price
-​ Outside factors
-​ Shifts in demand
-​ Price of substitute or complementary goods
-​ Consumer tastes for a good
-​ Effect on consumer income on demand
-​ If good is inferior, raise in consumer income will cause leftward shift in
demand
-​ Good is normal will cause rightward shift
-​ Supply vs quantity supplied
-​ Quantity supplied
-​ Amount of a good or service that produces want to sell price
related
-​ Supply
-​ Does not change with price
-​ Equilibrium
-​ Equilibrium price
-​ Give price exceeds quantity supplied
-​ Excess demand
-​ A situation in which given price quantity demanded exceeds
quantity supplied
-​ Elasticity
-​ Percentage change in quantity demanded/percentage change in price
-​ 1>n>0=inelastic
-​ 1<n elastic
-​ Demand elasticity and total expenditure
-​ Price x quantity
-​ Price elasticity of supply
-​ Elasticity of quantity/elasticity of price
-​ Burden of excise tax
-​ Tax burden refers to effect on the price the suppliers received
-​ Burden of tax falls on more inelastic
-​ Income elasticity
-​ Percentage change in quantity demanded/percentage change in income
-​ Cross elasticity of demand
-​ % change in QD for good x/ % change in price of good Y
-​ Price floor
-​ Minimum permissible price
-​ Binding if set above equilibrium price
-​ (minimum wage)
-​ Price ceiling
-​ Maxim allowed price
-​ (rent controls)
-​ Economic surplus
-​ Demand curve show max price consumers pay
-​ Supply curve shows min price producers sell
-​ Deadweight loss
-​ Not maximized economic surplus
-​ Efficiency and price controls
-​ Quota
-​ Consumer behavior
-​ Normal good
-​ Good where demand rises where demand rises when consumers
income increases
-​ Inferior good
-​ A good where the demand rises when consumers income
decreases
-​ Consumer surplus
-​ Measure of total amount of money consumers willing to pay
-​ Explicit costs
-​ Input costat that required an outlay of money by the firm
-​ Implicit costs
-​ Input costs that do not require an outlay of money
-​ Accounting profit = revenue - explicit costs
-​ Explicit costs - implicit costs = economic profit
-​ Average product
-​ Output of unit per unity of labor
-​ Marginal product
-​ Increase in output from an increase in input
-​ Diminishing marginal product
-​ If increasing amounts of variable factor applied to given waunity of the
fixed factor
-​ Worker who do all the tasks required to manufacture product, each
can specialized on one task and marginal product