test 1

Question 1

CHAP 1: what is economics?

Answer 1

• Economics is the study of the use of scarce resources to satisfy unlimited human wants.
• Scarcity is inevitable and is central to all economies and all economic problems.

Question 2

CHAP 1: what are the 3 society resources and explain each

Answer 2

Land: natural endowments, such as arable land, forests, lakes, crude oil, and minerals
Capital: all manufactured aids to production, such as tools, machinery, and buildings.
Labour: mental and physical human resources, including entrepreneurial capacity and management skills.

Question 3

CHAP 1: why do we call land, labour and capital factors of production?

Answer 3

because they produce the things people want

Question 4

CHAP 1: what are produced separated in and explain each.

Answer 4

• Produced is separated into goods and services
• Goods: tangible (e.g., cars, steel, and clothing)
• Services: intangible (e.g., legal advice, internet access, and education)
• We use goods and services to satisfy their wants

Question 5

CHAP 1: what is production

Answer 5

the act of making goods and services

Question 6

CHAP 1: what is consumption

Answer 6

the act of using goods and services to satisfy wants

Question 7

CHAP 1: explain Scarcity and Choice

Answer 7

• Existing resources are inadequate, meaning that there are enough to produce only a fraction of the goods and services that we want.
• All societies face the problem of deciding what to produce and how much each person will consume.
• The cost of the more of one thing is the amount of the other thing we must give up in order to get it.
• Scarcity implies that choices must be made, and making choices implies the existence of costs.

Question 8

CHAP 1: explain Opportunity Cost/Opportunity Cost Is a Ratio

Answer 8

• Making choices implies the existence of cost
• opportunity cost: the value of the next best alternative that is forgone when one alternative is chosen
• Whenever choices are limited by scarce resources, the decision to have more of one thing implies that we must give up something else.

FORMULA (johns notes): opportunity cost: loss/gain (look in johns notes)
ANOTHER FORMULA

Question 9

CHAP 1: what is the production possibilities boundary?

Answer 9

a curve showing which alternative combinations of output can be attained if all available resources are use efficiently; it is the boundary between attainable and unattainable output combinations. It has a negative slope because when all resources are being used efficiently, producing more of one good requires producing less of others. Illustrates three concepts: scarcity, choice, and opportunity cost.
look in notes for example

Question 10

CHAP 1: what is scarcity with the production possibility curve?

Answer 10

unattainable combinations outside the boundary

Question 11

CHAP 1: production possiblities boundary? What is considered inside the curve

Answer 11

attainable

Question 12

CHAP 1: name the Four Key Economic Problems

Answer 12

1. What is produced and How?
   - Resources allocation: the allocation of an economy’s scarce resources among alternative uses. determines the quantities of various goods that are produced.
2. What is Consumed and by Whom?
   - Economists seek to understand what determines the distribution of a nation’s total output among its people.
3. Why Are Resources Sometimes Idle?
   - Sometimes large numbers of workers are unemployed. At the same time, the managers and owners of businesses and factories could choose to produce more goods and services.
4. Is Productive Capacity Growing?
   - The capacity to produce goods and services grows rapidly in some countries, grows slowly in others, and actually declines in others. Growth in a country’s productive capacity can be represented by an outward shift of the production possibilities boundary.

Question 13

CHAP 1: explain the difference between Microeconomics and Macroeconomics

Answer 13

Micro: the study of the determination of the prices and quantities of specific products and factors of production.

Macro: the study of the determination of economic aggregates, such as total output, total employment, and the rate of economic growth

Question 14

CHAP 1: what is the economics and government policy

Answer 14

affect the outcome of all four key economic problems:
1. correct market failures resulting from misallocation of resources
2. address fairness of distribution of consumption across individuals
3. provide solutions to reduce idleness of nation’s resources
4. promote economic growth

Question 15

CHAP 1: explain self-organizing

Answer 15

• economy based on free-market transactions is self-organizing.
• when individual consumers and producers act independently to pursue their own self-interests, the collective outcome is coordinated—there is a “spontaneous economic order.”

Question 16

CHAP 1: explain efficiency

Answer 16

• efficiency means that the resources available to the nation are organized so as to produce the various goods and services that people want to purchase and to produce them with the least possible amount of resources.
• “an invisible hand”: elatively efficient order that emerges spontaneously out of the many independent decisions made by those who produce, sell, and buy goods and services.
• Free markets sometimes fail to produce efficient outcomes, and these failures often provide a motivation for government intervention. Many market outcomes may be efficient but perceived by many to be quite unfair.

Question 17

CHAP 1: explain self-interest and incentives

Answer 17

• Sellers usually want to sell more when prices are high because by doing so they will receive higher earnings and thus be able to afford more of the things they want.
• buyers usually want to buy more when prices are low because by doing so they are better able to use their scarce resources to acquire the many things they desire.
• the overall market prices and quantities are determined by their collective interactions.
• market prices and quantities will fluctuate up and down as buyers change their preferences and sellers change their abilities to produce.

Question 18

CHAP 1: explain the 3 types of The Decision Makers and Their Choices

Answer 18

• 3 types of decision makers: consumers, producers, government
• Consumers: Consumers purchase various kinds of goods and services with their income; they usually earn their income by selling their labour services to their employers
• Producer: interested in earning profits or they may be non-profit or charitable organizations. hire workers, purchase, or rent various kinds of material inputs and supplies, and then produce and sell their products.
• Government: hire workers, purchase or rent material and supplies, and produce goods and services. provide their goods and services at no direct cost to the final user; their operations are financed not by revenue from the sale of their products but instead by the taxes they collect from individual consumers and producers. governments create and enforce laws and design and implement regulations that must be followed by consumers and producers.

Question 19

CHAP 1: explain the 2 ways how decisions are made

Answer 19

• Maximizing Decisions: consumers and producers make their decisions in an attempt to do as well as possible for themselves. When individuals decide how much of their labour services to sell to producers and how many products to buy from them, they are assumed to make choices designed to maximize their well-being, or utility. When producers decide how much labour to hire and how many goods to produce, they are assumed to make choices designed to maximize their profits.
• Marginal Decisions: Firms and consumers who are trying to maximize usually need to weigh the costs and benefits of their decisions at the margin. a producer attempting to maximize its profits and considering whether to hire an extra worker must determine the marginal cost of the worker—the extra wages that must be paid—and compare it to the marginal benefit of the worker—the increase in sales revenues the extra worker will generate. A producer interested in maximizing its profit will hire the extra worker only if the benefit in terms of extra revenue exceeds the cost in terms of extra wages.
• Maximizing consumers and producers make marginal decisions to achieve their objectives; they decide whether they will be made better off by buying or selling a little more or a little less of any given product.

Question 20

CHAP 1: explain the circular flow of income and expenditure

Answer 20

• The red line shows the flow of goods and services
• The blue line shows the payments made to purchase these
• The prices that are determined in these markets determine the incomes that are earned.
• People who get high prices for their factor services earn high incomes; those who get low prices earn low incomes.
• The distribution of income refers to how the nation’s total income is distributed among its citizens.

Question 21

CHAP 1: explain production and trade: specialization

Answer 21

• Specialization of labour: The specialization of individual workers in the production of particular goods or services
• Two reasons why specialization is extraordinarily efficient compared with universal self-sufficiency: individual abilities differ and because they specialize.
• Individual abilities differ: allows individuals to do what they can do relatively well while leaving everything else to be done by others. economy’s total production is greater when people specialize than when they all try to be self-sufficient.
• Because they specialize: concentrates on one activity becomes better at it as they gain experience through their own successes and failures.

Question 22

CHAP 1: explain explain production and trade: the division of labour

Answer 22

• technical advances have made it efficient to organize production methods into large-scale firms organized around what is called the division of labour.
• Division of labour: the breaking up of a production process into a series of specialized tasks, each done by a different worker
• Each worker repeatedly does one or a few small tasks that represents only a small fraction of those necessary to produce any one product.

Question 23

CHAP 1: explain explain production and trade: money and trade

Answer 23

• trading became centred on particular gathering places called markets.
• the term “market” has a much broader meaning, referring to any institutions that allow buyers and sellers to transact with each other, which could be by meeting physically or by trading over the Internet
• Specialization must be accompanied by trade. People who produce only a few things must trade with other people to obtain all the other things they want.
• Market economy: refer to a society in which people specialize in productive activities and meet most of their material wants through voluntary market transactions with other people.
• Barter: economic system in which goods and services are traded directly for other goods and services
• A successful barter transaction thus requires what is called a double coincidence of wants
• If a farmer has wheat and wants a hammer, they merely have to find someone who wants wheat. The farmer takes money in exchange. Then they find a person who wants to sell a hammer and give up the money for the hammer.
• Money greatly facilitates trade, which itself facilitates specialization.
• money has played a central role in driving economic growth and prosperity over hundreds of years.

Question 24

CHAP 1: explain explain production and trade: globalization

Answer 24

• Globalization: the increased importance of international trade.
• major causes of globalization are the rapid reduction in transportation costs and the revolution in information technology
• The cost of moving products around the world fell greatly over the last half of the twentieth century because of containerization and the increasing size of ships.
• Our ability to transmit and analyze data increased even more dramatically, while the costs of doing so fell sharply.
• This revolution in information and communication technology has made it possible to coordinate economic transactions around the world in ways that were difficult many years ago
• As Canadian firms relocate production facilities to countries where costs are lower, domestic workers are laid off and must search for new jobs, perhaps needing retraining in the process.
• Firms often use the threat of relocation to extract financial assistance from governments, placing those governments in difficult positions.

Question 25

CHAP 1: what is market economy?

Answer 25

economy based on free-market transactions

Question 26

CHAP 1: Types of Economic Systems: Traditional Economies

Answer 26

• behaviour is based primarily on tradition, custom, and habit.
• system works best in an unchanging environment.
• under such static conditions, a system that does not continually require people to make choices can prove effective in meeting economic and social needs.
• They also usually inherited their specific jobs, which they handled in traditional ways.

Question 27

CHAP 1: Types of Economic Systems: Command Economies

Answer 27

• Command economy: most economic decisions are made by a central planning authority.
• Such economies are characterized by the centralization of decision making.
• The plan must be continually modified to take account not only of current data but also of future trends in labour and resource supplies and technological developments.
• This is a notoriously difficult exercise, not least because of the unavailability of all essential, accurate, and up-to-date information.

Question 28

CHAP 1: Types of Economic Systems: Free-Market Economies

Answer 28

• Free-market economy: an economy in which most economic decisions are made by private households and firms
• Decisions relating to the basic economic issues are decentralized.
• The main coordinating device is the set of market-determined prices—which is why free-market systems are often called price systems.
• all these decisions are made by buyers and sellers acting through unhindered markets.
• The government provides the background of defining property rights and protecting citizens against foreign and domestic enemies but, beyond that, markets determine all resource allocation and income distribution.

Question 29

CHAP 1: Types of Economic Systems: Mixed Economies

Answer 29

• Economies that are fully traditional or fully centrally planned or wholly free market are pure types that are useful for studying basic principles.
• In practice, every economy is a mixed economy in the sense that it combines significant elements of all three systems in determining economic behaviour.
• The degree of the mix varies from sector to sector.
• the command principle was used more often to determine behaviour in heavy-goods industries, such as steel, than in agriculture. Farmers were often given substantial freedom to produce and sell what they wanted in response to varying market prices.
• economists speak of a particular economy as being centrally planned, we mean only that the degree of the mix is weighted heavily toward the command principle. When we speak of one as being a market economy, we mean only that the degree of the mix is weighted heavily toward decentralized decision making.

Question 30

CHAP 1: explain Economics in the Social Sciences

Answer 30

• discipline that aims to answer questions about the real world—how individuals behave, what drives the actions of producers, and how governments make the decisions they do. always related to other aspects of society, such as politics, history, philosophy, law, and sociology.

Question 31

CHAP 1: explain government in the modern mixed economy

Answer 31

• Based primarily on voluntary transactions between individual buyers and sellers
• Private individuals have the right to buy and sell what they want, to accept or refuse work that is offered to them, and to move where they want when they want.
• Key institutions are private property and freedom of contract, both of which must be maintained by active government policies. The government creates laws of ownership and contract and then provides the institutions, such as police and courts, to enforce these laws.
• Governments: they intervene in market transactions to correct what economists call market failures and provide public goods
• public goods, are usually not provided at all by markets because their use cannot usually be restricted to those who pay for them.
• private producers or consumers impose costs called externalities on those who have no say in the transaction.
• Externalities exist when factories pollute the air and rivers.
• financial institutions, such as banks, mortgage companies, and investment houses, may indulge in risky activities that threaten the health of the entire economic system. These market failures explain why governments sometimes intervene to alter the allocation of resources
• important issues of equity arise from letting free markets determine people’s incomes: people lose their jobs because firms are reorganizing to become more efficient in the face of new technologies, others keep their jobs, but the marketplaces so little value on their services that they face economic deprivation,
• almost everyone accepts some government intervention to redistribute income toward individuals or families with fewer resources.

Question 32

CHAP 1: what is the consumption formula?

Answer 32

C=a+bW (go look in johns notes)

Question 33

CHAP 2: what is the difference between positive and normative statements?

Answer 33

• Normative statements: a statement about what ought to be; it is based on a value judgment. Cannot be evaluated solely by a recourse to facts
• Positive statements: a statement about what actually is, was, or will be; it is not based on a value judgment.
• Statements about matters of fact, and so disagreements about them are appropriately dealt with by an appeal to evidence.
• Distinguishing what is actually true from what we would like to be true requires distinguishing between positive and normative statements.
• Two distinctions: positive statements need not be true, the inclusion of a value judgment in a statement does not necessarily make the statement itself normative.
• Are the statements only about actual or alleged facts? If so, it is a positive one.
• Are value judgments necessary to assess the truth of the statement? If so, it is normative.

Positive: high interest rates encourage saving, increasing prices for cigs will reduce consumption

Normative: people should be encouraged to save, government should increase tax on cigarettes to reduce consumption

Question 34

CHAP 2: explain the 3 disagreements among economists

Answer 34

• 1. because of poor communication. They often fail to define their terms or their points of reference clearly, and so they end up “arguing past” each other, with the only certain result being that the audience is left confused.
• 2. economists’ failure to acknowledge the full state of their ignorance. There are many points on which the evidence is far from conclusive. In such cases, a responsible economist makes clear the extent to which their view is based on judgments about the relevant (and uncertain) facts.
• 3. other public disagreements are based on the positive/normative distinction. Different economists have different values, and these normative views play a large part in most discussions of public policy.
• economists rarely agree unanimously on an issue.

Question 35

CHAP 2: explain theories

Answer 35

• constructed to explain things. economists may seek to explain what determines the quantity of eggs bought and sold in a particular month in Manitoba and the price at which they are sold.
• economists have developed theories of demand and supply.
• theories are distinguished by their variables, assumptions, and predictions.

Question 36

CHAP 2: explain variables

Answer 36

• basic elements of any theory are its variables
• Variable: is a well-defined item, such as a price or a quantity, that can take on different possible values.
• two broad categories of variables that are important in any theory: endogenous variable and exogenous variable.
• Endogenous variable: a variable that is explained within a theory. Sometimes called an induced variable or a dependent variable
• Exogenous variable: a variable that is determined outside the theory. Sometimes called an autonomous variable or an independent variable

Question 37

CHAP 2: explain assumptions

Answer 37

• A theory’s assumptions concern motives, directions of causation, and the conditions under which the theory is meant to apply.

Question 38

CHAP 2: explain motives

Answer 38

• assumption that everyone pursues their own self-interest when making economic decisions.
• Individual consumers are assumed to strive to maximize their utility, while producers are assumed to try to maximize their profits.
• we also assume that they know how to go about getting it within the constraints they face.

Question 39

CHAP 2: explain causation

Answer 39

• if they assume one variable is related to another, there is some casual link between the two of them
• Producers supply more wheat because the growing conditions improve; they are not assumed to experience better weather as a result of their increased supply of wheat.
  how one variable affects another

Question 40

CHAP 2: explain testing theories

Answer 40

• theory is tested by confronting its predictions with empirical evidence.
• The scientific approach is central to the study of economics: Empirical observation leads to the construction of theories, theories generate specific predictions, and the predictions are tested by more detailed empirical observation.
• Theory and observation are in continuous interaction.
• Starting (at the top left) with the assumptions of a theory and the definitions of relevant terms, the theorist deduces by logical analysis everything that is implied by the assumptions.
• These implications are the predictions or the hypotheses of the theory.
• The theory is then tested by confronting its predictions with evidence. If the theory is in conflict with facts, it will usually be amended to make it consistent with those facts
• 1. Proposition
• 2. Research/testing
• 3. validation

Question 41

CHAP 2: explain statistical analysis

Answer 41

• Most theories generate a prediction of the form “If X occurs, then Y will also happen.”
• Statistical analysis can be used to test such predictions.
• the same data can be used simultaneously to test whether a relationship exists between X and Y and, if it does exist, to provide an estimate of the magnitude of that relationship.
• The variables that interest economists—such as the level of employment, the price of a laptop, and the output of automobiles—are generally influenced by many forces that vary simultaneously.
• if economists are to test their theories about relations among specific variables, they must use statistical techniques designed for situations in which other things cannot be held constant.

Question 42

CHAP 2: explain correlation

Answer 42

how two variables compare to each other, if there is a common trend

Question 43

CHAP 2: explain correlation vs causation

Answer 43

• A finding that X and Y are positively correlated means only that X and Y tend to move together.
• This correlation is consistent with the theory that X causes Y, but it is not direct evidence of this causal relationship.
• The causality may be in the opposite direction—from Y to X. Or X and Y may have no direct causal connection; their movements may instead be jointly caused by movements in some third variable, Z.
• Most economic predictions involve causality. Economists must take care when testing predictions to distinguish between correlation and causation. Correlation can establish that the data are consistent with the theory; establishing causation usually requires more advanced statistical techniques.

Question 44

CHAP 2: explain the advantage and disadvantage of collecting data and using them to test theories

Answer 44

• The advantage is that economists do not need to spend much of their scarce research time collecting the data they use.
• The disadvantage is that they are often not as well informed about the limitations of the data collected by others as they would be if they had collected the data themselves.

Question 45

CHAP 2: explain index numbers

Answer 45

• Index numbers: a change in price over time, a measure of some variable, conventionally expressed relative to a base period, which is assigned to the value 100
• Economists frequently look at data on prices or quantities and explore how specific variables change over time.
• the problem is that it may be difficult to compare the time paths of the two different variables if we just look at the “raw” data.
• Comparing the time paths of two data series is difficult when absolute numbers are used.
• it is easier to compare the two paths if we focus on relative rather than absolute changes. One way to do this is to construct some index numbers.
  FORMULA JOHNS NOTES

Question 46

CHAP 2: explain more complex index numbers

Answer 46

• Consumer Price Index (CPI). This is a price index of the average price paid by consumers for the typical collection of goods and services that they buy. The inclusion of the word “average,” however, makes the CPI a more complex index number than the ones we have constructed here.

Question 47

CHAP 2: explain the 3 types of datasets

Answer 47

1. cross sectional: collecting data from multiple agents, households companies etc. at one point int time. We fix timeframe to see a comparison of the different objects (bar graph). EXAMPLE: avrg cost of homes in 2024 by province
2. time series: collecting data from single agent, household, company etc. over a given time period (broken line graph) EXAMPLE: avrg price of a single family home from 2010 to 2024 across canada
3. panel: you are collecting data on different agents, households, companies etc. over a given time period (broken line graph with multiple lines) EXAMPLE: avrg price of a home from 2010-2023 in mtl, ottawa, toronto

Question 48

CHAP 2: explain scatter diagrams

Answer 48

• Scatter diagram: a graph showing two variables, one measured on the horizontal and the other on the vertical axis. Each point represents the values of the variables of a particular unit of observation
• It is designed to show the relation between two different variables.
• plot a scatter diagram: values of one variable are measured on the horizontal axis and values of the second variable are measured on the vertical axis.
• Any point on the diagram relates a specific value of one variable to a corresponding specific value of the other.
• may be either cross-sectional data or time-series data.
• Saving tends to rise as income rises.

Question 49

CHAP 2: explain slope of a straight line

Answer 49

• Slopes show you how much one variable changes as the other changes. The slope is defined as the amount of change in the variable measured on the vertical axis per unit change in the variable measured on the horizontal axis.
• If we let X stand for whatever variable is measured on the horizontal axis and Y for whatever variable is measured on the vertical axis, the slope of a straight line is ΔY/ΔX. [1]1

Question 50

CHAP 2: explain non-linear functions

Answer 50

• Non-linear relations are much more common than linear ones.
• Marginal costs typically increase as annual output rises.
• For non-linear functions, the slope of the curve changes as X changes. Therefore, the marginal response of Y to a change in X depends on the value of X.

Question 51

CHAP 2: explain functions with a minimum or a maximum

Answer 51

• many relations change directions as the independent variable increases.
• Profits rise and then eventually fall as output rises.
• an increase in output leads to an increase in profit.
• At either a minimum or a maximum of a function, the slope of the curve is zero. Therefore, at the minimum or maximum the marginal response of Y to a change in X is zero.

Question 52

CHAP 3: explain quantity demanded

Answer 52

• Quantity demanded: The total amount of any particular good or service that consumers want to purchase during some time period
• Affected by: income, price of other goods, consumer preferences, population, significant weather changes
• Law of demand: P(down) D(up), P(up) D(down)), changing demand: move along curve
• 2 things about this concept are important
• 1. quantity demanded is a desired quantity: the amount that consumers want to purchase when faced with a particular price of the product, other products’ prices, their incomes, their preferences, and everything else that might matter. may be different from the amount that consumers actually succeed in purchasing. If sufficient quantities are not available, the amount that consumers want to purchase may exceed the amount they actually purchase.
• To distinguish these two concepts, the term quantity demanded is used to refer to desired purchases, and such phrases as quantity bought or quantity exchanged are used to refer to actual purchases.
• 2. quantity demanded refers to a flow of purchases, expressed as so much per period of time: 1 million units per day, 7 million per week, or 365 million per year.
• Amount of some product that consumers in the relevant market want to buy during a given time period is influenced by: products own price, consumers income, prices of other products, consumers preferences or tastes, population, significant changes in weather

Question 53

CHAP 3: explain quantity demanded and price

Answer 53

as the price goes down, the product becomes a cheaper way of satisfying a desire.

Question 54

CHAP 3: explain demand schedules and demand curves

Answer 54

• Demand schedule: showing the relationship between quantity demanded and the price of a product, other things being equal. It is a table showing the quantity demanded at various prices.
• Second way to show this is by doing a graph: showing the relationship between quantity demanded and price is to draw a graph.
• Price is plotted on the vertical axis, and the quantity demanded is plotted on the horizontal axis.
• Demand curve: curve drawn through these points, shows the quantity that consumers want to buy at each price
• The negative slope of the curve indicates that the quantity demanded increases as the price falls.
• Each point on the demand curve indicates a single price–quantity combination. The demand curve as a whole shows something more.
• The demand curve represents the relationship between quantity demanded and price, other things being equal; its negative slope indicates that quantity demanded increases when price decreases.
• when economists speak of demand, they mean the entire demand curve—to the relationship between desired purchases and all the possible prices of the product.
• Demand: the entire relationship between the quantity demanded of a product and the price of that product.
• Single point on a demand schedule or curve: the quantity demanded at that point.

Question 55

CHAP 3: explain shifts in the demand curve

Answer 55

• Drawn with the assumption that everything except the product’s own price is being held constant.
• A change in any of the variables (other than the product’s own price) that affect the quantity demanded will shift the demand curve to a new position.
• Can shift from left to right = difference is crucial
• Shifts rightwards: each price corresponds to a higher quantity than it did before. This is an increase in demand.
• Shifts leftward: each price corresponds to a lower quantity than it did before. less is desired at each price. This is a decrease in demand

Question 56

CHAP 3: explain the 5 important causes of shifts in the demand curve

Answer 56

1. Consumers’ Income
   - If average income rises, consumers as a group can be expected to desire more of most products, other things being equal.
   - Normal goods: Goods for which the quantity demanded increases when income rises. This term reflects economists’ empirical finding that the demand for most products increases when income rises.
   - Inferior goods: Goods for which quantity demanded falls when income rises
2. Prices of Other Goods
   - Substitutes in consumption: goods that can be used in place of another good to satisfy similar needs or desires
   - Complements in consumption: goods that tend to be consumed together
   - Thus, a fall in the price of a complement for a product will shift that product’s demand curve to the right. More will be demanded at each price
3. Consumers’ preferences
   - powerful effect on their desired purchases.
   - change in preferences may be long-lasting, such as the shift from typewriters to computers, or it may be a short-lived fad as is common with many electronic games.
   - a change in preferences in favour of a product shifts the demand curve to the right.
   - a change in preferences against some product has the opposite effect and shifts the demand curve to the left.
4. Population
   - increase in population with purchasing power, the demands for all the products purchased by the new people will rise.
   - we expect that an increase in population will shift the demand curves for most products to the right, indicating that more will be demanded at each price.
5. Significant Changes in Weather
   - demands for some products are affected by dramatic changes in the weather. (winter: cold will lead to demand for electricity, summer: ac)

Question 57

CHAP 3: explain quantity supplied

Answer 57

• Quantity supplied: the amount of a good or service that producers want to sell during some time period of that product
• Affected by: price of inputs, technology, price of alternate goods, gov taxes or subsidies, significant changes in weather, availability of suppliers
• Quantity supplied is a flow; it is so much per unit of time.
• Note also that quantity supplied is the amount that producers are willing to offer for sale; it is not necessarily the amount they succeed in selling, which is expressed by quantity sold or quantity exchanged.
• any event that makes production of a specific product more profitable will lead firms to supply more of it.
• The quantity supplied of a product is influenced by the following key variables: Product’s own price: Prices of inputs, Technology, Government taxes or subsidies, Prices of other products, Significant changes in weather, Number of suppliers

Question 58

CHAP 3: explain
Movements Along the Curve Versus Shifts of the Whole Curve

Answer 58

• We have seen that “demand” refers to the entire demand curve, whereas “quantity demanded” refers to a particular point on the demand curve.
• Change in demand: a change in the quantity demanded at each possible price of the product, represented by a shift in the whole demand curve
• Change in quantity demanded: refers to a movement from one point on a demand curve to another point, either on the same demand curve or on a new one.
• A change in quantity demanded can result from (1) a shift in the demand curve with the price constant, (2) a movement along a given demand curve due to a change in the price, or (3) a combination of the two.
• 3 possibilities in turn:
• 1. An increase in demand means that the whole demand curve shifts to the right; at any given price, an increase in demand causes an increase in quantity demanded
• 2. A movement up and to the left along a demand curve represents a reduction in quantity demand in response to a higher price.
• 3. When there is a change in demand and a change in the price, the overall change in quantity demanded is the net effect of the shift in the demand curve and the movement along the new demand curve.
• An increase in demand means that the demand curve shifts to the right, and hence quantity demanded is higher at each price.

Question 59

CHAP 3: explain quantity supplied and price

Answer 59

• A basic economic hypothesis is that the price of the product and the quantity supplied are related positively, other things being equal. That is, the higher the product’s own price, the more its producers will supply; the lower the price, the less its producers will supply.
• as the product’s price rises, producing and selling this product becomes a more profitable activity
• Firms interested in increasing their profit will therefore choose to increase their supply of the product.

Question 60

CHAP 3: explain supply schedules and supply curves

Answer 60

• Supply schedule: a table showing the relationship between quantity supplied and the price of a product, other things being equal
• Supply curve: graphical representation of the relationship between quantity supplied and the price of a product, other things being equal
• The supply curve represents the relationship between quantity supplied and price, other things being equal; its positive slope indicates that quantity supplied increases when price increases.
• Supply: the entire relationship between the quantity of some good or service that producers wish to sell and the price of that product, other things being equal
• A single point on the supply curve refers to the quantity supplied at that price.

Question 61

CHAP 3: explain shifts in the supply curve

Answer 61

• Means that each price there is a change in the quantity supplied.
• A cost-saving innovation increases the quantity supplied at each price.
• A change in any of the variables (other than the product’s own price) that affect the quantity supplied will shift the supply curve to a new position

Question 62

CHAP 3: explain the 6 possible causes of shifts in the supple curves

Answer 62

• Firm’s inputs: all things that a firm uses to make its products, such as materials, labour, and machines.
• the higher the price of any input used to make a product, the less profit there will be from making that product.
• rise in the price of inputs reduces profitability and therefore shifts the supply curve for the product to the left; a fall in the price of inputs makes production more profitable and therefore shifts the supply curve to the right.

2. Technology
   - what is produced and how it is produced depend on the state of technology and knowledge.
   - Nanotechnology, 3D printing, cloud computing, robotics, and artificial intelligence are all examples of technologies that are both reducing the costs of producing existing goods and also increasing the range of products we are able to produce.
   - These changes in the state of knowledge cause shifts in supply curves for countless products.
   - technological innovation that decreases the amount of inputs needed per unit of output reduces production costs and hence increases the profits that can be earned at any given price of the product.
   - increased profitability leads to increased willingness to produce, this technological change shifts the supply curve to the right.
3. Government Taxes or Subsidies
   - Factors that increase firms’ costs shift the supply curve leftward, while those reducing costs shift it rightward
   - Governments often impose excise taxes on goods like gasoline, cigarettes, and alcohol, decreasing their profitability and shifting the supply curve left.
   - Conversely, subsidies, common in agricultural markets like the US and EU, increase profitability and shift the supply curve right
   - For instance, subsidies for biofuel production in the US and Canada due to environmental concerns have shifted the biofuel supply curve to the right
4. Prices of Other Products
   - Changes in the price of one product may lead to changes in the supply of some other product because the two products are either substitutes or complements in the production process.
5. Significant Changes in Weather
   - Significant weather changes, especially in agriculture, can greatly impact supply. Events like droughts, excessive rain, flooding, hurricanes, and frosts can drastically reduce wheat, coffee, banana, and fruit crops.
   - Industrial sectors also face supply reduction due to dramatic weather events; for instance, hurricanes in 2017 damaged industrial facilities in Florida, Puerto Rico, and the Caribbean, while a massive wildfire in 2016 disrupted oil-sands production in Fort McMurray, Alberta.
6. Number of Suppliers
   - If profits are being earned by current firms, then more firms will choose to enter this industry and begin producing.
   - The effect of this increase in the number of suppliers is to shift the supply curve to the right.

Question 63

CHAP 3: explain the supply Movements Along the Curve Versus Shifts of the Whole Curve

Answer 63

• As with demand, it is important to distinguish movements along supply curves from shifts of the whole curve.
• Change in supply: a change in the quantity supplied at each possible price of the product, represented by a shift in the whole supply curve
• Change in quantity supplied: a change in the specific quantity supplied, represented by a change from one point on a supply curve to another point, either on the original supply curve or on a new one.
• an increase in supply means that the whole supply curve has shifted to the right, so that the quantity supplied at any given price has increased; a movement up and to the right along a supply curve indicates an increase in the quantity supplied in response to an increase in the price of the product.
• A change in quantity supplied can result from (1) a change in supply with the price constant, (2) a movement along a given supply curve because of a change in the price, or (3) a combination of the two.

Question 64

CHAP 3: explain the concept of a market

Answer 64

• Originally, the term market designated a physical place where products were bought and sold. still use the term this way to describe such places as Granville Island Market in Vancouver, Kensington Market in Toronto, or Jean Talon Market in Montreal.
• Market: any situation in which buyers and sellers can negotiate the exchange of goods or services
• competitive markets: markets in which the number of buyers and sellers is sufficiently large that no one of them has any appreciable influence on the market price.

Question 65

CHAP 3: explain market equilibrium

Answer 65

• The equilibrium price corresponds to the intersection of the demand and supply curves.
• Excess demand: a situation in which, at the given price, quantity demanded exceeds quantity supplied
• Excess supply: a situation in which, at the given price, quantity supplied exceeds quantity demanded
• The quantities demanded and supplied at any price can be read off the two curves; the excess supply or excess demand is shown by the horizontal distance between the curves at each price.
• excess supply causes downward pressure on price.
• excess demand causes upward pressure on price.
• Equilibrium price: the price at which quantity demanded equals quantity supplied. Also called the market-clearing price.
• Disequilibrium price: Any price at which the market does not “clear”—that is, quantity demanded does not equal quantity supplied
• Disequilibrium: a situation in a market in which there is excess demand or excess supply

Question 66

CHAP 3: explain the Changes in Market Equilibrium

Answer 66

• Changes in any of the variables, other than price, that influence quantity demanded or supplied will cause a shift in the demand curve, the supply curve, or both.
• There are four possible shifts:
• 1. an increase in demand (a rightward shift in the demand curve)
• 2. a decrease in demand (a leftward shift in the demand curve)
• 3. an increase in supply (a rightward shift in the supply curve)
• 4. a decrease in supply (a leftward shift in the supply curve).
• Comparative statics: the derivation of predictions by analyzing the effect of a change in a single exogenous variable on the equilibrium.
• With this method, we derive predictions about how the endogenous variables (equilibrium price and quantity) will change following a change in a single exogenous variable (the variables whose changes cause shifts in the demand and supply curves).
• The difference between the two positions of equilibrium must result from the change that was introduced, because everything else has been held constant.
• horizontal axis is simply labelled “Quantity. This means quantity per period in whatever units output is measured.
• “Price,” the vertical axis, means the price measured as dollars per unit of quantity for the same product.
• Shifts in either demand or supply curves will generally lead to changes in equilibrium price and quantity

Question 67

CHAP 3: explain the effects of the four possible curve shifts are as follows

Answer 67

1. An increase in demand (the demand curve shifts to the right).
   - An increase in demand creates a shortage at the initial equilibrium price, and the unsatisfied buyers bid up the price.
   - This rise in price causes a larger quantity to be supplied, with the result that at the new equilibrium more is exchanged at a higher price.
2. A decrease in demand (the demand curve shifts to the left).
   - A decrease in demand creates a surplus at the initial equilibrium price, and the unsuccessful sellers bid the price down.
   - As a result, less of the product is supplied and offered for sale.
   - At the new equilibrium, both price and quantity exchanged are lower than they were originally.
3. An increase in supply (the supply curve shifts to the right).
   - An increase in supply creates a surplus at the initial equilibrium price, and the unsuccessful sellers force the price down.
   - This drop in price increases the quantity demanded, and the new equilibrium is at a lower price and a higher quantity exchanged.
4. A decrease in supply (the supply curve shifts to the left).
   - A decrease in supply creates a shortage at the initial equilibrium price that causes the price to be bid up.
   - This rise in price reduces the quantity demanded, and the new equilibrium is at a higher price and a lower quantity exchanged.

• Note that in each of these four examples, a change in some exogenous variable has caused one of the curves to shift, then in response to this shift, there has been a movement along the other curve toward the new equilibrium point.
• Price and quantity are the endogenous variables, and they both adjust in response to the change in the exogenous variable.

Question 68

CHAP 3: explain relative prices

Answer 68

• individual prices are determined by the forces of demand and supply.
• Absolute price: the amount of money that must be spent to acquire one unit of a product. Also called money price
• Relative price: the ratio of the money price of one product to the money price of another product; that is, a ratio of two absolute prices
• what matters for demand and supply is the price of the product in question relative to the prices of other products; that is, what matters is the relative price
• whenever we refer to a change in the price of one product, we mean a change in that product’s relative price, that is, a change in the price of that product relative to the prices of all other goods. The demand and supply of specific products depends on their relative, not absolute, prices.

Question 69

CHAP 3: explain a crucial caveat

Answer 69

• The demand-and-supply model is used by economists all over the world on a daily basis to examine developments in the markets for oil, copper, steel, aluminum, beef, wheat, lumber, newsprint, and many other commodities.
• the model has important limitations and cannot be usefully applied to the markets for smartphones, cars, branded clothing, watches and jewellery, and many other consumer products.

Question 70

CHAP 3: explain the difference between stock and flow

Answer 70

stock: variable whos valve has meaning at a specific point in time (2000 eggs in warehouse 15/13/2018)

flow: variable whos valve has a time dimension, x per unit of time (2000 eggs sold per week > month)

Question 71

CHAP 4: explain price elasticity of demand

Answer 71

• Demand is said to be elastic when quantity demanded is quite responsive to changes in price.
• When quantity demanded is relatively unresponsive to changes in price, demand is said to be inelastic.
• The more responsive quantity demanded is to changes in price, the less the change in equilibrium price and the greater the change in equilibrium quantity resulting from any given shift in the supply curve.

a steep curve will cause an in elastic demand
FORMULA

elasticity < % change in P: inelastic

elasticity > % change in P: elastic

Question 72

CHAP 4: what r the vertical and horixontal lines of elasticity

Answer 72

vertical = 0
horizontal = infinity

Question 72

CHAP 4: explain interpreting numerical elasticities

Answer 72

• demand curves have negative slopes, therefore an increase in price is associated with a decrease in quantity demanded, and vice versa.
• the more responsive the quantity demanded to a change in price, the greater the elasticity and the larger is η.
• Elasticity is zero when a change in price leads to no change in quantity demanded.
• vertical demand curve has an elasticity of zero, which is rare because it means that it indicates that consumers do not alter their consumption at all when price changes.
• when even a very small change in price leads to an enormous change in quantity demanded, elasticity is a very large number
• Inelastic demand: following a given percentage change in price, there is a smaller percentage change in quantity demanded; elasticity is less than 1.
• Elastic demand: following a given percentage change in price, there is a greater percentage change in quantity demanded; elasticity is greater than 1
• Moving down a linear demand curve, price elasticity falls continuously, even though the slope is constant.

Question 73

CHAP 4: What Determines Elasticity of Demand?

Answer 73

• mostly determined by the availability of substitutes, the importance in consumers’ budgets, and the time period under consideration.

Question 74

CHAP 4: explain availability of substitutes

Answer 74

• A change in the price of these products, with the prices of the substitutes remaining constant, can be expected to cause much substitution.
• A fall in the price of broccoli leads consumers to buy more broccoli and less of other green vegetables
• a rise in price leads consumers to buy less broccoli as they substitute toward other green vegetables.
• all foods or all clothing or all methods of transportation, have many fewer satisfactory substitutes than do products defined much more narrowly
• For example, there are far more substitutes for Diet Pepsi than there are for the broader categories of diet colas, soft drinks, or all beverages. As a result, the demand elasticity for Diet Pepsi is significantly higher than for beverages overall.
• products with close substitutes tend to have elastic demands; products with no close substitutes tend to have inelastic demands. Narrowly defined products, which tend to have many substitutes, have more elastic demands than do more broadly defined products, which tend to have few substitutes.

Question 75

CHAP 4: explain importance of the product in Consumers’ Budgets

Answer 75

• Some products represent only a very small fraction of consumers’ monthly budgets and even a large price change may lead to only a small change in quantity demanded.
• a similar price change for larger items—such as a car or monthly rent or a home appliance—will have a much larger impact on overall expenditures and thus will likely lead consumers to significantly adjust their quantity demanded. The general result is higher price elasticity for more expensive items.
• Products that represent a small fraction of consumers’ budgets tend to have inelastic demands. Products that represent a large fraction of consumers’ budgets tend to have elastic demands.

Question 76

CHAP 4: demand: short run and long run

Answer 76

• Demand elasticity also depends to a great extent on the time period being considered. Because it takes time to develop satisfactory substitutes, a demand that is inelastic in the short run may prove to be elastic when enough time has passed.
• EXAMPLE: output restrictions by the Organization of Petroleum Exporting Countries (OPEC) increased the world price of oil by 400 percent.
• Short run: which lasted several years, the demand for oil was very inelastic.
• Long run: the high price of oil led to significant adjustments, such as the use of smaller and more fuel-efficient cars, more efficient home heating, and alternative fuel sources
• The same happens when consumers or firms adjust their buying habits in response to a price change.
• The longer the time span, the more elastic is the price elasticity of demand.
• Short run demand curve shows the immediate response of quantity demanded to a change in price
• long-run demand curve shows the response of quantity demanded to a change in price after enough time has passed to develop or switch to substitute products.
• Long term and short-term demand are both relevant for both price increases and price decreases
• The magnitude of the changes in the equilibrium price and quantity following a shift in supply depends on the time allowed for demand to adjust.

Question 77

CHAP 4: explain elasticity and total expenditure

Answer 77

• the response of total expenditure depends on the price elasticity of demand
• total expenditure at any point on the demand curve is equal to price times quantity
• Formula: Total Expenditure = Price X Quantity
• price and quantity move in opposite directions along a demand curve
• The change in total expenditure depends on the relative changes in the price and quantity
• the change in total expenditure on a product in response to a change in price depends on the elasticity of demand
• If demand for a product is inelastic, a reduction in price leads to a decline in total expenditure. If demand for a product is elastic, a reduction in price leads to an increase in total expenditure.

Question 78

CHAP 4: explain price elasticity of supply

Answer 78

• Price Elasticity of Supply: measures the responsiveness of the quantity supplied to a change in the product’s price. Also referred to as supply elasticity. It is denoted �� and defined as follows: Formula
• increase in price causes an increase in quantity supplied
• Upward-sloping supply curves all have positive elasticities because price and quantity change in the same direction.
• Supply elasticity is computed using average price and average quantity supplied
• IMPORTANT SPECIAL CASES: If the supply curve is vertical—the quantity supplied does not change as price changes—then elasticity of supply is zero. A horizontal supply curve has an infinite elasticity of supply: There is one critical price at which output is supplied but where a small drop in price will reduce the quantity that producers are willing to supply from an indefinitely large amount to zero. Between these two extremes, elasticity of supply varies with the shape of the supply curve
• FORMULA
• Elasticity > 1: elastic
• Elasticity < 1: inelastic

Question 79

CHAP 4: explain the supply short run and long run

Answer 79

• The short-run supply curve shows the immediate response of quantity supplied to a change in demand given producers’ current capacity to produce the good. Example, COVID-19 pandemic firms quickly increased their production of hand sanitizer and medical masks
• The long-run supply curve shows the response of quantity supplied to a change in demand after enough time has passed to allow producers to adjust their productive capacity. Example: New oil fields can be discovered, wells drilled, and pipelines built over years but not in a few months.
• The long-run supply for a product is more elastic than the short-run supply.
• The size of the changes in the equilibrium price and quantity following a shift in demand depends on the time frame of the analysis.

Question 80

CHAP 4: explain elasticity matters for taxation

Answer 80

• elasticity is crucial to determining whether consumers or producers (or both) end up bearing the burden of taxes.
• Taxes increase the P of a product, this cost is shared between both the producer and consumer: causes the supply curve to move left/up, this moves the Eq to a higher P and lower Q. The inelastic side takes most of the tax burden
• Excise taxes: a tax on the sale of a particular product
• point of sale of the product, the firms collect the tax on behalf of the government and then remit the tax collections.
• Tax incidence: the location of the burden of a tax-that is, the identity of the ultimate bearer of the tax
• application of demand-and-supply analysis will show that tax incidence has nothing to do with whether the government collects the tax directly from consumers or from firms.
• The burden of an excise tax is distributed between consumers and producers in a manner that depends on the relative elasticities of supply and demand.
• The burden of an excise tax is shared by consumers and producers.
• After the imposition of an excise tax, the difference between the consumer and seller prices is equal to the tax. In the new equilibrium, the quantity exchanged is less than what occured without the tax.
• The distribution of the burden of an excise tax between consumers and producers depends on the relative elasticities of supply and demand.
• When demand is inelastic relative to supply, consumers bear most of the burden of excise taxes. When supply is inelastic relative to demand, producers bear most of the burden.

Question 81

CHAP 4: explain income elasticity of demand

Answer 81

• important determinant of demand is the income of consumers
• income elasticity of demand: a measure of the responsiveness of quantity demanded to a change in income
• FORMULA
• JOHNS NOTES
• Normal goods: a good for which quantity demanded rises as income rises-its income elasticity is positive
• Inferior goods: a good for which quantity demanded falls as income rises-its income elasticity is negative

Question 82

CHAP 4: normal goods

Answer 82

• The income elasticity of normal goods can be greater than one (elastic) or less than one (inelastic), depending on whether the percentage change in quantity demanded is greater or less than the percentage change in income that brought it about.

Question 83

CHAP 4: explain income inelastic

Answer 83

• If income elasticity is positive but less than one, we say the demand for this good is income inelastic.

Question 84

CHAP 4: explain income elastic

Answer 84

• If income elasticity is positive and greater than one, we say the demand for this good is income elastic.

Question 85

CHAP 4: explain luxuries vs necessities

Answer 85

• Empirical studies find that basic food items—such as vegetables, bread, and cereals—usually have positive income elasticities less than 1
• Necessities: products for which the income elasticity of demand is positive but less than one
• Luxuries: products for which the income elasticity of demand is positive and greater than one
• The more necessary an item is in the consumption pattern of consumers, the lower is its income elasticity.
• When incomes are low, consumers may eat almost no green vegetables and consume lots of starchy foods, such as bread and pasta; when incomes are higher, they may eat cheap cuts of meat and more green vegetables along with their bread and pasta;
• when incomes are higher still, they are likely to eat higher-quality and prepared foods of a wide variety.

Question 86

CHAP 4: explain inferior goods

Answer 86

• both necessities and luxuries have positive income elasticities and thus are normal goods.
• In contrast, inferior goods have a negative income elasticity because an increase in income actually leads to a reduction in quantity demanded.
• An example of an inferior good for some consumers might be ground beef or packages of instant noodles; as consumers’ incomes rise, they reduce their demand for these products and consume more higher-quality items.

Question 87

CHAP 4: explain cross elasticity of demand

Answer 87

• Cross elasticity of demand: a measure of the responsiveness of the quantity of one product demanded to change in the price of another product
• The positive or negative signs of cross elasticities tell us whether products are substitutes or complements.
• Income elasticity and cross elasticity are also concepts that become clearer with practice.
• FORMULA
• JOHNS NOTES

Question 88

CHAP 5: explain government controlled prices

Answer 88

• In a free market the equilibrium price equates the quantity demanded with the quantity supplied.
• Government price controls are policies that attempt to hold the price at some disequilibrium value.
• Some controls hold the market price below its equilibrium value, thus creating a shortage at the controlled price.
• Other controls hold price above its equilibrium value, thus creating a surplus at the controlled price.

Question 89

CHAP 5: explain disequilibrium prices

Answer 89

• any voluntary market transaction requires both a willing buyer and a willing seller.
• if, at a particular price, quantity demanded is less than quantity supplied, demand will determine the amount exchanged, while the rest of the quantity supplied will remain in the hands of the unsuccessful sellers.
• if, at a particular price, quantity demanded exceeds quantity supplied, supply will determine the amount actually exchanged, while the rest of the quantity demanded will represent unsatisfied demand of would-be buyers.
• In disequilibrium, quantity exchanged is determined by the lesser of quantity demanded and quantity supplied.
• For any price below �0, the quantity exchanged will be determined by the supply curve.
• For any price above �0, the quantity exchanged will be determined by the demand curve.
• The solid portions of the S and D curves show the actual quantities exchanged at different disequilibrium prices.
• At any disequilibrium price, quantity exchanged is determined by the lesser of quantity demanded and quantity supplied.

Question 90

CHAP 5: explain price floor

Answer 90

• Price floor: the minimum permissible price that can be charged for a particular good or service. A price floor that is set at or below the equilibrium price has no effect because the free-market equilibrium remains attainable. If, however, the price floor is set above the equilibrium, it will raise the price, in which case it is said to be binding.
• may be established by rules that make it illegal to sell the product below the prescribed price, as in the case of a legislated minimum wage
• the government may establish a price floor by announcing that it will guarantee a certain price by buying any excess supply. Such guarantees are a feature of many agricultural income-support policies.
• Binding price floors lead to excess supply. Either an unsold surplus will exist, or someone (usually the government) must enter the market and buy the excess supply.
• A binding price floor leads to excess supply.
• Why might the government want to implement a policy that leads to these results? One reason is that the people who succeed in selling their products at the price floor are better off than if they had to accept the lower equilibrium price.
• Workers and farmers are among the politically active, organized groups who have gained much by persuading governments to establish price floors enabling them to sell their goods or services at prices above free-market levels.
• If the demand is inelastic, as it often is for agricultural products, sellers earn more income in total (even though they sell fewer units of the product). The losses are spread across the large and diverse set of consumers, each of whom suffers only a small loss.

Question 91

CHAP 5: explain price ceillings

Answer 91

• Price ceiling: the maximum price at which certain goods and services may be legally exchanged. Price ceilings on oil, natural gas, electricity, and rental housing have been frequently imposed by governments in Canada and elsewhere. If the price ceiling is set above the equilibrium price, it has no effect because the free-market equilibrium remains attainable. If, however, the price ceiling is set below the free-market equilibrium price, the price ceiling lowers the price and is said to be binding.
• Binding price ceilings lead to excess demand. The quantity exchanged will be less than in the free-market equilibrium. A binding price ceiling causes excess demand and invites a hidden market.

Question 92

CHAP 5: explain Who Gets the Goods When There is Excess Demand

Answer 92

• Free markets with flexible prices eliminate excess demand by allowing prices to rise, thereby allocating the available supply among would-be purchasers.
• Stores -> standing in lines became a way of life in the centrally planned economies of the Soviet Union and Eastern Europe, in which price controls and product shortages were pervasive.
• tickets to concerts and sporting events when promoters set a price at which demand exceeds the supply of available seats. In these cases, ticket “scalpers” often buy blocks of tickets and then resell them at market-clearing prices. Storekeepers (and some ticket sellers) often respond to excess demand by keeping goods “under the counter” and selling only to customers of their own choosing.
• Sellers’ preferences: allocation of products in excess demand by decisions of the sellers
• ration the product: If the government dislikes the allocation of products by long line-ups or by sellers’ preferences, it creates only enough ration coupons to match the quantity supplied at the price ceiling and then distributes the coupons to would-be purchasers, who then need both money and coupons to buy the product. The coupons may be distributed equally among the population or on the basis of some criterion, such as age, family status, or occupation.

Question 93

CHAP 5: explain hidden markets

Answer 93

• Hidden market: a situation in which products are sold at prices that violate a legal price control
• Binding price ceilings always create the potential for hidden market because a profit can be made by buying at the controlled price and selling at the (illegal) hidden-market price.
• Three common goals that governments have when imposing price ceilings are:
• 1. To restrict production (perhaps to release resources for other uses, such as wartime military production)
• 2. To keep specific prices down
• 3. To satisfy notions of equity in the consumption of a product that is temporarily in short supply (such as building materials immediately following a natural disaster)
• To the extent that binding price ceilings give rise to a hidden market, it is likely that the government’s objectives motivating the imposition of the price ceiling will be thwarted.

Question 94

CHAP 5: explain rent Controls: A Case Study of Price Ceilings

Answer 94

• Rent controls provide a vivid illustration of the short- and long-term effects of market interventions to control prices.
• the specifics of rent-control laws vary greatly and have changed significantly since they were first imposed many decades ago.
• current laws often permit exemptions for new buildings and allowances for maintenance costs and inflation.
• in many countries rent controls have evolved into a “second generation” of legislation that focuses on regulating the rental-housing market in addition to controlling the price of rental accommodation.

Question 95

CHAP 5: explain The predicted Effects of Rent Controls

Answer 95

• 1. there will be a shortage of rental housing because quantity demanded will exceed quantity supplied. Since rents are held below their free-market levels, the available quantity of rental housing will be less than if free-market rents had been charged.
• 2. The shortage will lead to alternative allocation schemes. Landlords may allocate by sellers’ preferences, which may include (illegally) allocating the rental units on the basis of gender, religion, or race. Alternatively, government may intervene by using security-of-tenure laws, which protect tenants from eviction and thereby give them priority over prospective new tenants.
• 3. Hidden markets will appear. For example, landlords may (illegally) require tenants to pay “key money” reflecting the difference in value between the free-market and the controlled rents. In the absence of security-of-tenure laws, landlords may force tenants out when their leases expire in order to (illegally) extract a large entrance fee from new tenants.
• they are applied to a highly durable product that provides services to consumers for long periods
• Once built, an apartment can be used for decades. As a result, the immediate effects of rent control are typically quite different from the long-term effects.
• The short-run supply curve for rental housing is quite inelastic.
• The long-run supply curve of rental accommodations is highly elastic.
• Rent control causes housing shortages that worsen as time passes

Question 96

CHAP 5: explain Who Gains and Who Loses?

Answer 96

• Existing tenants in rent-controlled accommodations are the principal gainers from a policy of rent control.
• As the gap between the controlled and the free-market rents grows, as it would if housing demand were growing relative to supply, those who are still lucky enough to live in rent-controlled housing gain more and more.
• Landlords suffer because they do not get the rate of return they expected on their investments. Some landlords are large companies, and others are wealthy individuals.
• They find that the value of their savings is diminished, and sometimes they find themselves in the ironic position of subsidizing tenants who are far better off than they are
• potential future tenants -> The housing shortage will hurt some of them because the rental housing they will require will not exist in the future. These people, who wind up living farther from their places of employment or in apartments otherwise inappropriate to their situations, are invisible in debates over rent control because they cannot obtain housing in the rent-controlled jurisdiction.

Question 97

CHAP 5: explain policy alternatives

Answer 97

• Most rent controls today are intended to protect lower-income tenants, not only against “profiteering” by landlords in the face of severe local shortages but also against the steadily rising cost of housing.
• The market solution is to let rents rise sufficiently to cover the rising costs.
• The higher rents, however, will force some people to make agonizing choices, both to economize on housing and to spend a higher proportion of total income on it, which mean consuming less housing and less of other things as well.
• Binding rent controls create housing shortages. The shortages can be removed only if the government, at taxpayer expense, either subsidizes housing production or produces public housing directly.
• the government can make housing more affordable to lower-income households by providing income assistance directly to these households, thereby giving them access to higher-quality housing than they could otherwise afford.
• it is important to recognize that providing greater access to rental accommodations has a resource cost. The costs of providing additional housing cannot be voted out of existence; all that can be done is to transfer the costs from one set of persons to another.

Question 98

CHAP 5: Demand as “Value” and Supply as “Cost”

Answer 98

• the highest price that consumers are willing to pay and the lowest price that producers are willing to accept for any given unit of the product.
• viewing demand and supply curves in this manner helps us think about how society as a whole benefits by producing and consuming any given amount of some product.
• For each unit of a product, the price on the market demand curve shows the value to some individual consumer from consuming that unit.
• For each unit of a product, the price on the market supply curve shows the lowest acceptable price to some individual firm for selling that unit. This lowest acceptable price reflects the firm’s additional cost from producing that unit.

Question 99

CHAP 5: Economic Surplus and Market Efficiency

Answer 99

• Once the demand and supply curves are put together, the equilibrium price and quantity can be determined
• Economic surplus: the difference between the value to consumers and the additional costs to firms
• For any given quantity of a product, the area below the demand curve and above the supply curve shows the economic surplus associated with the production and consumption of that product.
• a market for any specific product is efficient if the quantity of the product produced and consumed is such that the economic surplus in that market is maximized. Note that this refers to the total surplus but not its distribution between consumers and producers
• A competitive market will maximize economic surplus and therefore be efficient when price is free to achieve its market-clearing equilibrium level

Question 100

CHAP 5: explain Market Efficiency and Price Controls

Answer 100

• Binding price floors and price ceilings in competitive markets lead to a reduction in overall economic surplus and thus to market inefficiency.
• The imposition of a binding price ceiling or price floor in an otherwise free and competitive market leads to market inefficiency.
• Binding price floors and price ceilings do not merely create gains for some and losses for others as they redistribute economic surplus.
• They also lead to a reduction in the quantity of the product transacted and a reduction in total economic surplus.
• Society as a whole receives less economic surplus as compared with the free-market case. In this sense, these policies make society as a whole worse off.

Question 101

CHAP 5: explain one final application: output quotas

Answer 101

• Output quotas are commonly used in Canadian agriculture, especially in the markets for milk, butter, and cheese. Output quotas are sometimes used in other industries as well; for example, they are often used in large cities to regulate the number of taxi drivers.
• Binding output quotas lead to a reduction in output and a reduction in overall economic surplus.
• Producers must incur a very high cost in order to purchase the quotas
• But for new producers wanting to get into the industry, the need to purchase an expensive quota represents a considerable obstacle. These large costs of purchasing the quota offset the benefits from selling the product at the (quota-induced) high price.

Question 102

CHAP 5: explain A Cautionary Word

Answer 102

• the effects of government policies to control prices in otherwise free and competitive markets, and we have shown that such policies usually have two results
• 1. there is a redistribution between buyers and sellers; one group is made better off while the other group is made worse off.
• 2. there is a reduction in the overall amount of economic surplus generated in the market; the result is that the outcome is inefficient and society as a whole is made worse off.
• Government intervention in free markets often leads to inefficiencies, prompting the question of why such intervention occurs.
• In many cases, government policies are driven by the desire to assist specific groups, even at the expense of overall efficiency.
• For instance, minimum wage laws are often seen as a way to alleviate poverty by boosting the income of low-wage workers, despite imposing costs on businesses and society.
• Policymakers advocating for policies that redistribute economic surplus while also reducing the total surplus available are making normative judgments about which societal groups deserve assistance at the expense of others.
• These judgments may be based on a thorough examination of genuine need or driven by political considerations crucial for the government’s re-election
• Despite potentially leading to inefficiency, there isn’t inherently a “wrong” aspect to government intervention in such cases
• These analytical results can then be used as inputs to the decision-making process, where they will be combined with normative and political considerations before a final policy decision is reached.