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Copy of Economics (Units 1,2,4)

Everything you need to know about the 5 main strands taught in Grade 12 U Economics

GE Dorta

on 21 January 2016

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Transcript of Copy of Economics (Units 1,2,4)

Unit 1
Applying Theories
of Economic Choice
Unit 2
Unit 4
1. Examine the basic concepts of economics.
2. Understanding of the economic problem of scarcity and choice, as well as the use of resources.
3. Understand various types of economic systems used around the world.
4. Analyze opportunity cost and production possibilities curve.
5. Understand the three basic economic questions.
1.1: The Economic Problem
1.2: Economic Resources
1.3: Economic Choices
1.4: Production Possibilities Model
1.5: Economic Systems
1.6: Economists' Theories
Let's begin with the basics!
1.1: The Economic Problem
1.2: Economic Resources
1.4: Production Possibilites Model
1.5: Economic Systems
1.6: Economists' Theories

Let's take a look at the economists!
2.3: Supply
2.5: Competitive Market
2.1: Demand
2.6: Costs and Revenues of the Firm
2.7: Perfect Competition
2.8: Market Structure
2.9: Government Enterprise and Privatization
Before we can define what economics is, we must understand the basic reason for why it exists in the first place!
However, we do not have enough resources to fulfill all our wants and needs.
We have an unlimited amount of wants and needs that we desire to fulfill.
4.1: Historical and Contemporary Political Look at the Role of Government in US.
4.2: Deregulation and privatization (Benefits and Challenges)
4.3: Economic Goals and Good Governance
4.4: Taxation and Government Spending
4.5: Government Spending and the National Debt (Citizen Perspective)

2.1: Demand
2.2: Demand Elasticity
2.3: Supply
2.4: Supply Elasticity
2.5: Competitive Market
2.6: Costs and Revenues of the Firm
2.7: Perfect Competition
2.8: Market Structure
2.9: Government Enterprise and Privatization
This is known as scarcity.
Scarcity is defined by the fundamental economic problem of having unlimited human needs and wants but only a limited amount of resources
The solution to this problem is making appropriate economic choices.
Influenced by two factors:
1. Utility
the satisfaction one receives from an action/choice
Economic Problem = limited resources + unlimited wants
We ask ourselves, "What is the value in it for us?"
2. Opportunity Cost
Definition: the satisfaction one could have received from the alternative action/choice
We ask ourselves, "What do we miss out on if we make this decision?"
With these two factors, we are basically weighing out what the pros and cons are before making an economic decision!
A simple example of making an economic choice.
As a teenager, I am stuck trying to make a decision. Should I buy a new phone or a new laptop?
Here is the process I would go through in my head.
What do I need more right now?
Which one gives me more utility?
A new phone.

I could use this to make calls, take photos and as a schedule planner.
A new laptop. The one I have is broken and I need it for school work. A laptop is useful since it lets me complete all my school work.
Now we must look at the opportunity costs of each.
If I buy the phone, I would be missing out on a new laptop.
This means I would have to deal with using the computers at school or the slow one at my house.
If I bought the laptop, my opportunity cost would be not having a new cool phone with all the different features. I would have to deal with my older phone, but it still functions.
Let's not forget about price!
If the phone I want is $200.00 and the laptop is $1000.00, the opportunity cost of buying the laptop would be having an extra $800.00 to spend on other things.
My decision?

School is more important and I need a reliable laptop that will allow me to do all my work. I can always get a new phone and as long as the phone receives calls and sends text messages, that's all I will need it for! Even though the laptop is more expensive, it is worth paying in order to enjoy the benefits.
Now that we understand the basic purpose of economics, we can begin to define what economics is!
There are 2 branches of economics.
The behaviour of society as a whole and the patterns in decisions made.
The behaviour of one person as an individual, the choices they make and how it contributes to the economy
This is the focus of 1.2: Economic Choices
As stated earlier, the reason we cannot achieve our unlimited wants and needs it because of the limited amount of economic resources that are available.
There are 3 types of economic resources.
1. Land Resources
These are provided by the earth - Mother Nature herself. But as we know, not everything can be replenished which is why we only have a limited amount.
This includes, but is not limited to, land, water, forests, oil and minerals
2. Capital Resources
3. Labor Resources
This can include physical labour used directly in the production process.
It can also include mental labout used indirectly in the production process.
This refers to creativity, innovations and inventions. Remember that "A product/service must be invented before it can be produced!"
Resource Incomes
Whether companies use natural, capital or human resources, they are each compensated financially. Natural/capital resource owners are paid for letting production companies use their land/equipment and humans are paid wages/salaries for their efforts
Now let's look at their theories!
1723 - 1790
He was acknowledged as the founder of modern economics.

He is known for his theories of the ‘Invisible Hand’, ‘Laissez Faire’, and the ‘Division of Labour’.

He is acknowledged as the founder of the international socialist and communist movements.
1818 -1883
He was greatly influenced by the Industrial Revolution and experienced the distance between social classes. He is known for ‘Labour Theory of Value’, and the ‘Theory of Exploitation’.
1772 - 1823
Ricardo wanted to understand why certain people got what they did. He developed the ‘Theory of Rent’, ‘Rent and Population Growth’ and the ‘Corn Laws’.

He was greatly influenced by the Great Depression.

His theories were focused around the issue of unemployment and how that along with under spending by the government were great factors of the Great Depression.

This is why he approved of government intervention of getting the unemployed working again.
Invisible Hand
Theory of Exploitation
The concept that profit comes from employers exploiting their workers.
The concept that the market regulates itself, even though it may not appear so.
The concept in which the government does not intervene with private owned companies.
3 basic and essential questions
1. What to produce?
2. How to produce?
3. For whom to produce?
How much of each product should be produced to ensure the country is being most efficient?
Which resources should be used and how much?
How should the products be distributed? By the government or social customs?
3 Basic Economic Systems
1. Traditional Economy 
This economy is based on social customs and values that have existed for a long period of time. Thus, it does not adjust from generation to generation. Religion/Cultural is more significant than personal wealth/material possessions.
2. Market Economy
3. Command Economy
This type of economy is based on private ownerships and also referred to as capitalism. What defines this economy from the others is the concept of allowing individuals to use their purchasing power in order to make decisions
This type of economy is defined by everything beind owned by the government. The government in power used their judgement to make decisions for the rest of the population.
- Stable
- Firm grasp on beliefs and values
- Poverty
- Lack of individual freedoms
- Individual consumers have
power to make choices
- Encourages innovation
- Instability in price changes
- Private enterprises are selfish and do not think of everyone as a whole
- Equal distribution of income
- Government looks at society as a whole
- Government errors in decisions
- Inefficient use of resources
What kind of economy does USA have?
We have a mixed economy which is one that combines the characteristics that define both the market and command economies.
Economics is a science - a social science.
Know the Basics:
• Independent variable: causes the other variable to change (like time)

• Dependent variable: changes because of the independent variable (like speed)

• Inverse relationships: the independent variable rises/falls and the dependent variable has the opposite effect

• Direct relationships: as the independent variable rises/falls, so does the dependent variable

• Theory: an idea proven by facts/examples used to explain a concept/fact

• Ceteris paribus: an assumption that all other things remain the same

• Positive economics: “what is”; based on facts

• Normative economics: “what should be”; based on opinions
The production possibilities curve model is what economists use to illustrate the relationship between two goods. It is usually drawn so that it demonstrates an ideal situation - the maximum of one good is produced depending on the other product.
PPC – Production Possibilities Curve
a possible point but means that country is using resources inefficiently
an impossible point because there are not enough resources to produce that much
the country makes more wine at the expense of producing less cotton
the country is between producing the amount of wine and cotton between A and B
the country makes more cotton at the expense of producing less wine
The production possibilities curve shows the maximum capability of production. The PPC model is also influenced by three constant resources: capital, labour and natural resources.

This is a graph that compares two products to one another. It demonstrates the basic relationship between scarcity and choice. Using math, a person is able to use the graph to calculate what the loss in value will be if one product is made more than the other. If product A is produced more than product B, “x” (a variable) units of product B would be the opportunity cost and vice versa. The purpose of this model is to show the possible differences that may occur when a decision is made. For example, there can be an opportunity cost model for necklaces versus pencils, as indicated in the graph to the right.
Opportunity Cost Model
If a country is producing 3 million pencils and 10 million necklaces at the same time but wants to make 5 million pencils, the opportunity cost of would be 1 million necklaces. If a country is producing 4 million necklaces and wants to produce 5 million, the opportunity cost would be 1 million pencils.
Economics of Supply and Demand
1. Examine the relationship between supply and demand, as well as the effect of price.
2. Learn the meaning of elasticity.
3. Examine 4 market structures (2 are competitive and 2 are concentrated).
4. Examine the relationship between private businesses and crown owned corporations.
2.2: Demand Elasticity
2.4: Supply Elasticity
The Role of the Government and the US Economy
4.2: Deregulation and Privatization (Benefits and Challenges)
4.5: Government Spending and the National Debt
(Through the Eyes of the Citizen)
4.3: Economic Goals and Good Governance
4.4: Taxation and Government Spending
And all of this relates back to...
1. Analyze the good governance that exists in US.
2. Study the features that will transform a minority government into a majority one.

- Privatized sectors sometimes may run more effectively and offer better service than the government could
- Lower prices for consumers because of increased competitions
- Public corporations are usually driven by political considerations rather than economic ones
- Not everything will be privatized. Imagine if the Health of Canad awent bankrupt...then what?

- Removes regulatory authority over regulated companies (so the government stops owning water for example)

- In this environment, rates and services will be determinate by the market place in much same manner as other goods

- Process of removing government regulatory drives the market
Examples: banks, airlines, telecommunications, etc

Deregulation in Practice
In theory, it is good, but the moment a business is in trouble, it gets messy. Espefically if it is in charge of big responsibilities such as health.
•Complementary goals: goals that work together towards a common goal, both parties benefit
•Conflicting goals – goals that work against one another, one goal is achieved at the expense of another (being stepped over basically!)
Political stability - Issue of long term planning and investment and a climate conducive to investor confidence and economic growth

Reduced public debt - Issue of government spending versus revenue collected
Environmental Stewardship/Sustainability - economic activities should not harm the environment, but should we trade with countries that harm the environment?

Economic growth - changes in GDP [increase in skilled labour force, technological innovation, discovery of new raw materials] --> maintain a healthy rate of economic growth in order that present and future generations will enjoy a high standard of living)

Increased productivity and efficiency - due to competition
Equitable distribution of Income - level of taxes [Canada’s equalization problem] --> fairly distributing a country’s total output among its citizens (paying people fairly for the type of work they do)

Full employment - balance of technological growth and job loss --> minimize involuntary unemployment in the labour force; keep Canadian working and contributing to the Canadian economy (ensure that everyone is pulling their own weight so everyone is deserving of the benefits the government provides which only is provided because of people’s taxes)
Viable balance of payments and stable currency - value of imports should mirror value of exports; this keeps employment levels and exchange rate stable/ 5.Viable balance of payments: balance Canadian imports and exports (transactions with other countries should be fairly well balanced between dollars coming into and leaving Canada)

Price stability - both inflation and deflation are symptoms of an unhealthy economy

Economic Freedom - Principle of consumer sovereignty
Q: Why do we collect taxes?

A: To meet expected expenditures, like fiscal policies. Some could be used for unemployment benefits, social security, child benefits etc.

Government can set taxes at any level any time and day

Biggest trouble about fiscal policy is large deficit, 7 billion atm.

Q: How to get out of debt?

A: Reduce spending or increase taxes, or both.
(It is hard to please everybody, hard to decide which programs to shrink and which taxes to increase)
Tax and Citizens

Everyone believes taxes are too high, but we have health, transportation, education, parks.
Main purpose of taxes is to finance state activity, promote equity and influence conditions in various markets.

Taxes are about 1/3 of GDP

Direct and Indirect taxes:


Directly paid to the government ( income taxes, corporate taxes, gift tax, etc )

Progressive income tax where the tax rate takes a proportionally higher percentage from higher income earners

Regressive tax rate where the tax rate takes a proportionally lower percentage from the higher income earners

Proportional tax where the tax rates takes a constant percentage from all income earners

Borne solely by the consumer such as sales tax or value added tax, GST and PST
Types of Taxation

Personal income taxes
-% from wages and salaries, interest earnings and dividends from investments, capital gains and transfer payments

Corporate income taxes
-% of company’s annual profit

Excise taxes
-Often included in price, such as gas
-Highway usage ( 407 )
-Motor fuel is biggest one
-Basically taxes that are included in the price when you purchase something

Property Taxes
-Payable to local government on value of building or land
Fiscal Policy is arranged around two main concepts:
2.Source of the expenditure

Definition: relationship between a product’s price and quantity demanded

Law of demand: price and quantity are inversely related

Demand curve

Market Demand: sum of quantities demanded by all consumers in a market

Demand factors

a. Causes an increase (Increased income/economic growth, prices of other products increase, consumer expectation that the price will increase, number of buyers/population growth, consumer preference is favourable, successful advertising/promotion)

b. Causes a decrease (Bad publicity, recession/less disposable income, decrease in price of competing product, expectation that price will decrease)

Elasticity: demand of product decreases when price increases

Inelasticity: demand of product does not change when price varies
Inelastic demand graph:
Price increases, demand is fixed
Definition: the relationship between price and quantity supplied.
Shift in Supply Curve
- use of efficient production technology
- cheaper raw materials
- more readily available materials

- more expensive and/or a decrease in the quantity of available raw materials,
-a decrease in production efficiency.
A formula used to determine the coefficient of supply
Why are products inelastic?
-If the product requires a long time to produce it will have a less elastic supply
-If an item is very expensive to produce, it is difficult to increase supply (customized sports cars)
-If products are irreplaceable or so unique (Mona Lisa)
Demand and Supply Curves
Equilibrium=point at which demand meets supply
Government Intervention
- Taxes usually on inelastic products
- Purpose: to help producers or consumers
(Discussed in 2.8: Market Structure)
These are costs that a company must pay and does not depend on the number of products that are produced. However, if more products are produced, the fixed cost will appear to seem smaller.

Eg. property taxes and heating costs for the building
These are costs that change depending on the numbers of products produced. (e.g., labour and raw materials) which increase as production output increases.

Eg. labour and raw materials
Fixed Costs
Variable Costs
- can be divided into two sections: concentrated and competitive
- different firms will operate in different ways according to what is appropriate for them
Monopolistic Competition
-One very large firm
-Unique product
-Firm has total control over price
-Very little non-price competition

-Small amount of large firms
-Product differentiation exists
-Can control price with government
-Yes, there is non-price competition

-Many small firms
-Little price differentiation
-No control over price
-Little non-price competition

-Quite a few firms (not large)
-Differeniated by packaging etc
-Some influence on price
-Yes, there is non-price competition

Private Firms
-Good reputation/Customer service
-Full accountability/liability in public eye
-Earns majority of profit which is used for investment
-Price is not always best for consumers
-No competition
-Earns majority of the profits
-Offers quality customer service to be competitive
-Unemployment rate increases
-Same accountability but not as much as crown

is the process of designing a new business, i.e. a startup company offering a product, process or service. The entrepreneur perceives a new business opportunity and often exhibits biases in their perception and subsequent decision to exploit the opportunity.


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