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ECONOMICS (UNIT 2: Firms, Markets and Stakeholders (Production in the…

- - - - Quantity Of Capital
        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
        Technological Progress
        Consists of scientific discoveries and their application, advances in production methods, and the development of new types of products
        Quality of Labour
        Productivity is also tied to investment in human capital through education and training. Those with post secondary education in Canada leads the labour force in Canada to be more productive
        Quantity of Natural Resources
        Canada’s rich supplies of natural resources have contributed to its economic growth. When the stock of natural resources remains constant, however, this can have a negative impact on economic growth
        Social, Political, and Legal Factors
        Growth will be enhanced in a society that promotes competition, innovation, and entrepreneurship, as well as support by social institutions geared toward enterprise and profit making. In the political sphere, government regulation and taxes sometimes inhibit economic growth. A stable legal framework of property rights is essential to private investment and capital accumulation
  - - - Multiplier Effect
        The multiplier effect is the magnified impact of any spending change on aggregate demand
    - - Expansionary Fiscal Policy
        -With expansionary fiscal policy, governments increase their purchases, and thus raise injections into the circular flow.
        -Reducing taxes has the same effect - by withdrawing less from the income-spending stream people have more income to spend
      - Contractionary Fiscal Policy
        -With contractionary fiscal policy, governments decrease their purchases, and thus withdraw from the circular flow
        -Increasing taxes has the same effect - by withdrawing more from the income-spending stream people have less income to spend
  - - - Input Prices
        When a rise in the price of an input increases production costs, businesses reduce their real output and the aggregate supply curve will shift to the left
        Conversely, if the price of an input decreases, production costs fall and businesses raise their real output, causing the aggregate supply curve to shift to the right
        Resource Supplies
        Over the long run, supplies of resources in an economy - especially human and capital resources - tend to grow.
        Productivity
        Increases in productivity are due largely to technological progress
  - - - Annually 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.
        Opponents say this viewpoint is faulty - example during a contraction tax revenues decrease - to balance a budget the government would have to reduce spending which can worsen the economic slump
        Cyclically Balanced Budgets
        A less stringent principle - government revenues and expenditures need not be balanced every year, but over one business cycle.
        The deficits from periods of contraction should roughly equal the surpluses from periods of expansion
        Functional Finance
        The principle that government budgets should be geared to the yearly needs of the economy.
        Focus should be on correcting fluctuations caused by the business cycle
  - - - Wealth Effect
        Households have wealth, however when prices rise or fall, so does their wealth
        When the price level rises, the real value of household wealth decreases - because they feel they have less wealth, they spend less on consumption, resulting in a drop in real expenditures
        Foreign Trade Effect
        Changes in the price level also influence foreign trade
        The foreign trade effect involves a decrease in net exports (X - M), and thus a decline in real expenditures
    - - Consumption
        Personal consumption and saving are the two uses of disposable income
        Thus, consumer spending is determined when households decide how much to spend and how much to save
        Investment
        Investment represents spending on projects where earning a profit is anticipated
        Government Purchases
        A rise in government purchases (e.g. highway construction) causes an increase in aggregate demand
        A fall in government purchases (spending cuts) causes a decrease in aggregate demand
  - - - Currency
        Includes paper money issued by Canada’s central bank, the Bank of Canada, as well as coinage produced by the Royal Mint
      - Deposits
        Demand deposits - accounts of funds to which depositors have immediate access such as personal bank accounts (chartered banks)
        Notice deposits - accounts of funds to which deposit takers may require notice before withdrawals can be made because they offer higher interest (chartered and near banks)
        Term deposits - accounts of funds to which depositors have no access for a fixed period of time (chartered and near banks)
        Foreign Currency deposits - accounts of funds held by Canadian residents that are valued in foreign currency
  - - - Structural Unemployment
        -Unemployment due to a mismatch between people and jobs
        -As economies transform, so too do the new jobs that require completely different skills
        Frictional Unemployment
        -Unemployment caused by delays in matching available jobs and workers
        Cyclical Unemployment
        -Unemployment due to fluctuations in output and spending
        Seasonal Unemployment
        -Unemployment due to the seasonal nature of some occupations and industries
    - - Discouraged Workers
        Those who are not working, have looked for a job in the past 12 months and are willing to work, but have not sought employment in the past four weeks
        Underemployed Workers
        Those who have part-time jobs but who would prefer to work full-time
        Dishonesty
        People responding to Statistics Canada labour market survey may state that they are actively looking for work when, in fact, they are not
  - - - Expansionary Monetary Policy
        -Used by the Bank of Canada to stimulate output and increase employment
        -The Bank of Canada expands the money supply, shifting the money supply curve to the right, causing a drop in the equilibrium interest rate
        -Is used to eradicate a recessionary gap
      - Contractionary Monetary Policy
        -During an economic boom, the Bank of Canada can inhibit spending and inflation by decreasing the money supply
        -This will shift the money supply curve to the left, driving up the equilibrium interest rate
        -Is used to eradicate an inflationary gap
  - - - Shoe Leather Costs
        -Are the resources that are wasted when people change their behaviour to avoid holding money
        -This results in people buying more and wasting their money and society's resources
        Money Illusion
        -Is when people do not react rationally to inflation
        -When wages and prices rise due to inflation, but consumers respond to them in real terms
        -Money illusion occurs when people interpret nominal changes as real changes
        Menu Costs
        -Is the act of physically changing prices - this can be costly
        -Changing prices can also anger customers and they may take their business elsewhere
        -Menu costs discourage firms from adjusting prices quickly
        Future Price Uncertainty
        -A business invests resources with the hope of earning a profit, but inflation affects the real value of future dollars - makes business riskier and people are less likely to start a business
- - - - Benefits of Perfect Competition
        
        The long run equilibrium illustrates the advantages of perfectly competitive markets for buyers
        It also helps explain that consumers ultimately benefit when competitive producers act in their own self interest
        This is because LR equilibrium in a perfectly competitive market meets two requirements:
        Minimum cost pricing
        Marginal cost pricing
        
        Minimum Cost Pricing
        
        By operating at the break even point, where price equals minimum average cost, perfectly competitive businesses in the LR equilibrium satisfies the condition of minimum cost pricing
        By operating at minimum average costs, the business is choosing the least costly combination of inputs, and passing the cost savings on to the buyers
        
        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
        The profit maximizing output rule can be expressed as P = MC
        This benefits consumers because society’s resources are shifted to an industry only where there is a price that satisfies consumers
  - - - Markets are more likely to exhibit features of either monopoly or imperfect competition - which includes both monopolistic competition and oligopoly
        
        Monopoly
        
        As the 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
        
        Revenue Conditions
        
        A monopolist’s MR and AR are not equal
        As price increases, demand will decrease - therefore as the monopoly charges more, the marginal revenue will decrease as consumers may choose not to buy the product anymore
        MR will fall more quickly than price when quantity rises
        
        Profit Maximization
        
        To maximize profit, the business must find the point at which MR = MC; after this intersection is determined, the monopolist traces the output to the demand curve to determine 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 Interdependence - where the action of each business affects the other businesses
        As such, oligopolists can operate in either two ways: Rivals Among Businesses and Cooperation Among Businesses
  - - - Average Revenue
        
        Average revenue (AR) is the business’s total revenue per unit of output (q)
        Average Revenue (AR) = Total Revenue (TR) / Quantity of Output (q)
      - Marginal Revenue
        
        Marginal revenue (MR) is the EXTRA total revenue earned from an additional unit of output
        Marginal Revenue (MR) = Change in TR / Change in q
      - Profit Maximization
        
        Profit Maximization is when MR = MC
  - - - Monopolistic Competition
        They operate with minimal government oversight
        
        Revenue Conditions
        Price and average revenue are the same, but marginal revenue is below average revenue
        
        The 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. This profit maximizing output is at the point where MR = MC
        The Long Run
        The competitive elements of monopolistic competition become evident in the LR. The increased competition causes the business’s demand curve to shift to the left (decrease) - this is because at every price there are now fewer customers. Since there are so many substitutes, the new demand curve is even more elastic
      - Oligopoly
        An oligopoly is characterized by rivalry among competitors and faces a kinked demand curve. This is based on the different responses of competitors when the business either raises or reduces its price
        
        Revenue Conditions
        Just like the demand curve, the MR for an oligopoly has two distinct segments. Unlike the demand curve, however, they do not meet - they are instead joined by a vertical line at the profit maximizing output
        
        Profit Maximization
        The kinked demand curve - which applies equally in both the SR and the LR - explains why rival oligopolists tend to keep prices constant even as costs change. As long as MR intersects MC at the kinked point of the demand curve, the oligopolist would not change price
  - - - Perfect Competition
        
        A market where both demand and supply are unobstructed
        It is characterized by:
        Many buyers and sellers
        A standard product
        Easy entry and exit from industry
        Common in primary industries such as agriculture and financial markets for bonds and stocks
      - Monopolistic Competition
        
        Is the structure most prevalent in the service sector, for example the restaurant industry
        This market is characterized by:
        Large number of businesses
        Perceptible differences among the products of competitors Easy entry and exit of businesses
      - Oligopoly
        
        An oligopoly is a market in which there are only a few businesses, and entry to the industry is restricted
        Oligopolies are extremely common in the Canadian economy such as the steel, automobile, and insurance industries
        The product sold in oligopolies may or may not vary, depending on the particular market
        Examples include the Canadian banking industry, Canadian Wireless Telecommunications, Automotive Industry and OPEC
      - Monopoly
        
        A monopoly is in industry in which a single business supplies a product with no close substitutes and restricted entry to the industry
        This market is the exact opposite of a perfect competition
        Are common in Canada such as electrical power companies
      - Entry Barriers of Monopolies and Oligopolies
        
        Entry barriers are economic or institutional obstacles that stop potential competitors from setting up in an industry where economic profits are being made
        There are six main entry barriers: Increasing returns to scale, market experience, restricted ownership of resources, legal obstacles, market abuses, and advertising
  - - - This is the Canadian version of U.S. antitrust laws
        This legislation is aimed at prevention industrial concentration and abuses of market power
        The Competition Act of 1986 - covers business practices that prevent or lessen competition, with some penalties leading to imprisonment of company executives
    - - Product Differentiation
        
        This is a company’s attempt to distinguish its products from competitors’ products
        Product differentiation has two goals:
        To increase demand (thus raising the quantity demanded at every price)
        Decrease demand elasticity (so price increases won’t lead to losing too many customers to competitors)
      - Advertising
        
        This is a company’s attempt to distinguish its products from competitors’ products
        Advertising can play two roles in imperfect competition:
        Can provide the customer with information
        Can promote consumer preferences for a product
  - - - 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
        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
        
        Management Difficulties
        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
        
        Limited Natural Resources
        In primary industries, such as fishing, forestry or mining, a business may be able to acquire only a limited supply of natural resources
        Eventually an output level is reached where increases in all inputs lead to a smaller output
  - - - 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
        
        Consumer Surplus
        The consumer surplus for the entire market is the difference between the total benefit and the total expenditure. It is the area under the demand curve above the price the consumer is willing to pay
        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
        Negative external effects of producing or consuming a product - fall on outsiders, not market participants. The most common example is environmental pollution. 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
  - - - 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
      - Total Costs = Fixed Costs + Variable Costs
    - - Marginal Cost is the extra cost of producing an additional unit of output
      - Marginal Cost Curve
        
        The marginal cost curve is shaped like the letter “J”
        At low production output levels, the extra cost of each unit falls
        Marginal Cost starts to rise when MP (defined in terms of each new unit of labour) begins to fall
    - - Per unit costs are expressed in terms of a single level of output
      - There are three types of per-unit costs:
        
        Average Fixed Cost (AFC), Average Cost (AC), and Average Variable Cost (AVC)
        
        Average Fixed Cost (AFC) - is the fixed cost per unit of output
        Average Variable Cost (AVC) - is the variable cost per unit of output
        Average Cost (AC) - is the sum of average fixed cost (AFC) and average variable cost (AVC)
  - - - A tax on a particular good or services expressed as a dollar amount per unit of quantity. Because the tax is absorbed by the consumer and the producer, this will have an impact on the supply curve
    - - Sometimes the government sees fit to control prices, thus overriding the forces of supply and demand
        There are two types of price controls: price floors and price ceilings
        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
  - - - Output is the quantity of a good or service that results from production
      - Inputs are the resources used in production
      - In the short run, to increase production of a good a business must use more variable inputs
        Total product - this is the overall quantity of output produced with a given workforce
        Average product - the quantity of output produced per worker
        Marginal product - the extra output produced by an additional worker
    - - To be efficient, a business will have to use either a labour intensive production process, or a capital intensive production process
    - - Businesses face two types of costs: explicit and implicit
        When economic costs (implicit and explicit) are subtracted from revenue, the excess is known as economic profit
        
        Explicit costs are payments made by a business to businesses or people outside of it, such as labour, machinery, overhead expenses
        
        Implicit costs are the owner’s opportunity costs of being involved with a business
    - - At some point, as more units of a variable input are added to a fixed input, the marginal product will start to decrease
        Production is governed by the law of diminishing marginal returns
  - - - Wages
        Wages make up 70% of household income; therefore, the factors that determine wages play an important role in income inequality
        Labour Productivity
        More productive a worker is, the more profit a business will make, and the higher their wage will be
        Education
        In general, the more education a worker needs to perform a job, the higher the pay
        Other Incomes
        Risk Taking
        Workers in some occupations earn unstable incomes - successful risk takers can earn large incomes
        Ability
        Those that are gifted (athletes) can earn extravagantly high incomes
- - - - Law of Supply
        
        There is a direct relationship between a products quantity supplied and its price
        In general terms, businesses maximize their profits when they sell products at a higher price
        As such, the supply curve is UPWARD sloping
      - Supply Curve
        
        The supply curve is a graph that expresses possible combinations of prices and quantities supplied of a product
        Movement along the supply curve are changes in Quantity Supplied
      - Supply Factors
        
        Factors that can cause an increase or decrease in a product’s supply
        Number of Producers, Resource Prices, State of Technology, Changes in Nature, Prices of Related Products, and Producer Expectations
  - - - In competitive markets, demand and supply play a key role in coordinating the decisions of consumers and producers
        Changes in price drive quantities demanded and supplied to a point of stability - this intersection point is known as the Market Equilibrium
      - Surplus
        This is when the quantity supplied is greater than quantity demanded. The price is above equilibrium.
      - Shortage
        This is when the quantity demanded is greater than quantity supplied. The price is below equilibrium.
    - - Demand factors shifts the demand curve.
        If there is an increase in demand, the demand curve will shift to the right, increasing the equilibrium price
        If there is a decrease in demand, the demand curve will shift to the left, decreasing the equilibrium price
    - - Supply factors shifts the supply curve.
        If there is an increase in supply, the supply curve will shift to the right, decreasing the equilibrium price
        If there is a decrease in supply, the supply curve will shift to the left, increasing the equilibrium price
  - - - Law of Demand
        
        There is an inverse relationship between a products quantity demanded and its price
        The demand curve is DOWNWARD sloping
      - Demand Curve
        
        The demand curve is a graph that expresses possible combinations of prices and quantities demanded of a product
        Movement along the demand curve are changes in Quantity Demanded
      - Demand Factors
        
        Factors that can cause an increase or decrease in a product’s demand
        Number of Buyers, Income - Normal and Inferior Products, Price of Other Products, Consumer Preferences, and Consumer Expectations - Anticipation
  - - - Market Economy - economic activity is coordinated by many individuals who make independent decisions in a free marketplace
      - Command Economy - all production decisions are made by a small group of political leaders who have the power to enforce their decisions throughout the economy
      - Traditional Economy - an economic system in which economic decisions are made on the basis of custom
  - - - Elastic Demand - demand for which a percentage change in a product’s price causes a larger change in quantity demanded
      - Perfectly Elastic Demand - demand for which a product’s price remains constant, regardless of quantity demanded
      - Inelastic Demand - demand for which a percentage change in a product’s price causes a smaller change in quantity demanded
      - Perfectly Inelastic Demand - demand for which a product’s quantity demanded remains constant, regardless of price
  - - - Utility is the satisfaction or pleasure you gain from any action.
      - Opportunity Cost is the utility that could have been gained by choosing an action’s best alternative.
  - - - Inelastic Supply - supply for which a percentage change in a product’s price causes a smaller percentage change in quantity supplied
        Elastic Supply - supply for which a percentage change in a product’s price causes a larger percentage change in quantity supplied
      - Factors that Affect Price Elasticity of Supply
        
        The Immediate Run
        
        The Short Run
        
        The Long Run: Constant - Cost Industry and Increasing - Cost Industry
  - - - Economic Resources
        
        Natural Resources - resources from nature that are used in production, including land, raw materials, and natural processes
        Capital Resources - the processed materials, equipment, and buildings used in production
        Human Resources - is the human effort employed directly in production often referred to as labour
        Resource Incomes - economic resources have corresponding incomes, which reflect their contribution to production
- - - - The Current Account
        
        The summary of ALL international transaction associated with current economic activity in Canada and involving Canadian dollars
        This includes four types of transactions:
        Trade in merchandise
        Trade in services
        Flows of investment income
        Transfers
      - The Capital Account
        
        This account summarizes a narrow range of inflows and outflows involving Canadian dollars
        They are linked to savings and intangible assets such as patents or trademarks
      - The Financial Account
        
        The financial account summarizes all international transactions of financial assets involving Canadian dollars
  - - - There are factors that can cause the Canadian dollar demand and supply curves to shift
        These shifts will cause the equilibrium value of the exchange rate to change
        
        The factors that affect the equilibrium value of the exchange rate are:
        Price Differences
        Product Demand
        Interest Rates
        Speculation