ECON 102
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We want to satisfy our unlimited human wants but we are constrained by scarce resources (e.g.
time, money)
Extreme saver vs extreme consumer
Economics: efficient allocation of scarce resources to satisfy unlimited human wants
D.M.- “decision making”
4 properties constitute efficient decision making:
1. Trade-offs (option a vs b)
a. consumption vs investment (a.k.a. consumption now vs consumption later)
b. environment vs growth
c. equity vs efficiency
2. Opportunity cost (how much): the value of the next best alternative, what you sacrifice
3. Rational people think @ the margin: ability to make a logical decision, information to
make a logical decision
a. Ability
b. Logical (thinking at the margins)
c. More > less
4. Incentives
N
Yes
Rival
Y
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5. Trade can make every nation better off
a. Variety
b. Cheap goods
c. More
6. Free markets: efficiently allocate resources (invisible hand), do not interfere with the
market
7. Government intervention is required under 5 certain circumstances:
a. Equity (pensions, employment insurance, ?)
Excludable
Y
N
b. Property rights
c. Market power
private
Yes common
i. Monopoly: 1 seller = high price
good resource
ii. Monopsony: 1 buyer = low price
club
public
iii. Brand names
goods
good
d. Public goods (non-excludable, non-rival)
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Common resource: excludable but still rival, everyone can use it but there are limited amounts
 tragedy of commons (e.g. hunting)
Public goods: free rider problem (e.g. fireworks)
Private good:
Club goods: (e.g. Netflix)
e. Externalities: the unintentional impact of one person’s actions on the well-being
of a bystander (e.g. flu shot  you do it to protect yourself, unintentionally
protect others too). Taxes can be used to prevent negative externalities;
subsidies can be used to “encourage” positive externalities.
8. Living standards: a country’s standards of living depends on its ability to produce goods
and services (PRODUCTIVITY) y/l = productivity wage/price = living standard therefore
productivity is mean determinant of living standard
9. Inflation is a monetary phenomenon
10.
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https://urpe.wordpress.com/2019/01/22/the-unreal-basis-of-neoclassical-economics/
Thinking at the margin MR = MC
W = nominal wage
W/P = real wage
In the short run there is an inverse relationship between unemployment rate and inflation rate
Chapter 4
Competitive Markets
4 properties of competitive market:
1. must have many buyers and many sellers
2. homogeneous products
3. perfect information
4. free entry and exit  equal access to resources
Individuals are price takers, collectively we are price makers
Product differentiation:
Properties 2 + 3 = Law of one price: a seller cannot charge a higher price of the same good as
someone else
For competition to exist every supplier must be on an equal playing field
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Demand + Supply Model
Inverse relationship between P and Q
P = 100 - Q
P
Q
*Nobody’s demand curve is upward sloping  the line may move upwards (right)
Exogenous Variables:
1. Expectation
2. Income
3. P ^ s (substitute price changed)
4. P ^ c (compliment price changed)
Ceteris paribus
Endogenous variables = variables on Y and X axis
Supply Curve
Direct relationship between P and Q
Q=P
Price - Marginal Cost = Profit Margin
Higher price = greater profit margin = greater incentive to supply P
1. Input cost
2. Technology
Q
3. Expectations
*Nobody’s demand curve is upward sloping  the line may move upward (left)
Entrepreneurs create artificial scarcity (slow production when demand price drops)
Equilibrium: Qd = Qs
Qd = 100 - p
Qs = p
100 - p = p
100 = 2p
50 = p
Practice question p.89 A5, p.84 applications #3
Suppliers bring price down during a surplus
Suppliers increase price during a shortage
QUIZ DUE SUNDAY 11:59PM
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Demand function is the indirect relationship between price and quantity
Supply function is the direct relationship between prince and quantity
Demand function and supply function intersect @ the equilibrium
Price = below the equilibrium  people want to buy, suppliers don’t want to sell = shortage to
return to equilibrium the price must go back up
Price = above the equilibrium  people don’t want to buy, suppliers want to sell = surplus to
return to equilibrium price must go back down
P.84 Applications #6
Births = high in 2010  how will this affect price of babysitting in 2015 and 2025
In 2015 price of baby sitter will increase because demand will increase  demand shock
In 2025 price of baby sitter will decrease because demand will decrease  supply shock
Chapter 5
g: growth
u: unemployment
π: inflation
E: exchange
r: interest
g = high  u = low
Exporters want a weak Canadian dollar, importers want a strong Canadian dollar
Intentional bringing down of you dollar  devaluation
G  % GDP (gross domestic product)
Things that increase GDP:
1. Inequality
2. Crime, fires, treatments
3. Environment
4. Leisure
Necessary vs sufficient
High gdp - necessary for high quality of life but it is not sufficient for quality of life
GDP is:
The market value (gdp adds together many products into 1 measure of value of economic
activity)
of all (includes all items produced/sold, market value of housing services provided by
economy’s stock of housing)
final (
goods and services
produced
in a domestic economy
over a time period
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QUIZ DUE SUNDAY 11:59PM
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Political party info
NGDP/RGDP x 100
GDP Deflator: works w/ current qtys, ALL goods
Eptqt/Epoqt x 100
CPI: works w/ base year qtys, fixed set of goods
Eptqo/Epoqo x 100
QUIZ DUE SUNDAY 11:00PM
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Median voter theorem
If you want to sell products you should situate yourself close to your competition
Inflation  borrower gains, deflation  lender gains
Chapter 7
Determinants of productivity
Y = f(K ,L, H, N)
Y = capital/worker
K = physical capital
L = labor
H = human capital (skilled labour)
N = natural resources
Wizard of oz- early 19th century economy in deflation
Had to be careful about political writing
Dorothy is pure pristine economy
Tornado is deflation
Trying to take economy back
Scarecrow is farmers. No brain. Borrowed huge loans at high interest rates. Borrowers lost out.
In debt. They want brains to figure out the debt.
Tin man is industrialists (workers). Have no heart.  working hard can’t make ends meet
Lion represents William Jennings (politician). A coward. Wanted courage.
Emerald city, green, federal reserve
Print money to get inflation
Yellow brick road = gold standard (more money requires more gold)
Wizard = money printer (federal reserve guy)
Clicks the heel of silver slippers
Author was suggesting we use a silver standard (not gold).
“wizard of oz hidden message” ted talk
QUIZ DUE SUNDAY 11:00PM
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Went over midterm
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Productivity = main determinant of living standard
y=Y/L
Y = f(K ,L ,H, N)
y =( f(K ,L ,H, N))/L
y = f(k)
MPK (marginal product of capital) = y/k
*law of diminishing returns graph
Physical capital (K) must be supported by Income (I), in order for K to increase you need $
Only way to increase physical capital is to invest which requires savings
What is the cost of saving? Reduced consumption
If you can’t save  use someone else’s savings:
FDI: foreign direct investment  direct (e.g. German company comes to Canada and
builds factory)
FPI: foreign portfolio investment  indirect (e.g. person from Tokyo invests in Canadian
stocks)
* foreign investors are taking $ out of Canada
Foreign investors should go where MPK is high
What you need if you want capital to flow to your country  what you have to provide for
investors:
1. Stability/property rights
2. Educated labor force
3. Infrastructure
4. Low taxes
TFSA: tax free saving account
Human Capital
How do we increase H in Canada?
Education
1. Current output falls b/c instead of working people are in school
2. Brain drain: people leave after getting degrees to higher paying countries (incentives)
3. Diminishing returns: if everyone has a degree then it doesn’t give you an edge
Gov’t should only promote k-12  that’s why we pay for post-secondary
Reasons for inequality
1. Capital = mobile, labor = not mobile
2. Education
3. Compensation of CEOs is great (increased overtime) but regular employee’s wages have
stayed the same
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Video: sub-prime mortgage crisis
Incentives:
-interest rates were VERY low b/c banks had lots of cash
- from the gov’t (cental bank) b/c bush said everyone should afford mortgage
-money from china and india
-payments over 40 years instead of 25
Now everyone is wanting a mortgage, bankers make commission on mortgages
What goes up must come down
Securitization:
Asymmetric Information: one party knows more than the other
1. Principal Agent Problem (monitoring):
2. Adverse selection (screening):
3. Moral Hazard (monitoring): taking risks without having to bear the cost
Occupy wall street
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Chapter 8
Asymmetric Information: (3 problems leading to the mortgage crisis)
1. Principal Agent Problem
Agent maximizes his own profits
Ice cream employee steals money, eats ice cream
Bankers got commission for deals they made
Only the employee knows what’s going on
Solution is monitoring, but it’s very expensive
When they employee doesn’t care for the business and just does what’s best for them.
2. Adverse Selection
The worst clients are attracted
Lemon: a bad car
Lemons drive peaches out of the market
Fixed by screening
3. Moral
Prices went up, because everyone was buying, so they got another mortgage (home)
It compounds the problem
The solution is monitoring
Financial Markets: large companies borrow money by ordering stocks and bonds
Financial intermediaries: small companies borrow through a third party e.g. banks, insurance,
etc.
Stocks vs Bonds
Stocks- high risks, high returns (future economy looks good)
Bonds- low risk, low return (future economy looks bad) shareholders get paid 1st of business
goes under so bonds = more secure, you have to pay fess/commissions for every stock you buy
and sell so it’s better to buy and hold
P/E ratio: price to earning ration
P/E = 15  typical P/E ratio in Canada  15x earning per share
Greater than 15  good company or overvalued
Less than 15  bad company or undervalued
National accounts identity: C + I + g + NX = Y
Closed economy = no NX
Y-C-G=I
Y-C-G+T-T=I
T is for taxes net of transfers, what the gov’t taxes - what they give you back in form of
transfers:
1. welfare
2. employment insurance
3. pension
(Y - T - C) + (T - G) = I
Spvt = private savings  (Y -T - C)
Spub = public savings  (T - G)
DI (disposable income - consumptions)
National savings  S = I (b/c gov’t invests its savings)
T - G > 0 = surplus (B/S)
T - G < 0 = deficit (B/D)
T - G = 0 = balanced budget (B/B)
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Increased savings  increased invenstment  increased physical capital -->increased
productivity  Increase living standards
1. stability
2. taxes: high taxes on investments  don’t want to invest
3. debt:
4. diversification
5. Long-run vs. short-run
Investment = physical
Saving = financial
Risky = high interest rate
p.177- q.1 +7
Practice question
Y = 800
t = 150
Find: G,C,S,I
Spub= T - G
(20) = (150) - G
G = 130
Spvt= 50
Spub= 20
Spvt = Y - T - C
(50) = (800) - (150) - C
C = 600
I=Y-C-G
I = (800) - (600) - (130)
I = 70
S=I
S = 70
Loanable Funds Market Model:
Higher interest rates the greater the incentive for people to save
Equilibrium is where saving=investment
(if interest rates are too high, the bank has money, they lower interest rates, back to
equilibrium – if interest rates are too low everyone wants to invest, nobody saves, the bank has
no money, raises interest rate, goes back to equilibrium)
people need money = investors
cost of borrowing = interest rate
interest creates incentive to save -> opportunity cost of consumption S increases the line will
move right
If savings increase the line will move right then interests rates decrease then investment
increases then capital increases then y increases then w/p increases then living standard
increases
How can gov’t encourage saving:
Incentives (e.g TFSA)
Problem #1: gov’t can provide incentive to save but they can’t force you to save (efficiency)
Problem #2: you have to take care of the people who don’t have anything (equity)
https://edmontonjournal.com/news/politics/economists-skeptical-of-jobs-promised-bycorporate-tax-cuts
Youtube: progressive income tax a tale of 3 brothers
https://www.vox.com/policy-and-politics/2019/1/4/18168431/alexandria-ocasio-cortez-70percent
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3 financial statements: can show earnings per share (P/E ratio)
1. Balance sheets
 Assets
 Liabilities
 Equity: what shareholders receive
Assets – liabilities = equity
2. Income statement
3. Cash flow statement
Income statements:
Sales revenue – COGs (cost of goods sold) = EBIT (earnings before interest & taxes)
EBIT - interest = EBT (earnings before tax)
EBT - tax = NI (net income)
Itc – investment tax credits
Criticize of tfsaBoost investment directly – investment tax credit
Can lower tax liability if they can show they used money to invest in projects, machines etc
Investment curve moves with itc
Problem is interest rates go up, can boost investments but later on interest rates will go up
Immediate impact –
t-g = public saving Spub
saving curve moves left,
savings go down interest rates go up; cost of borrowing goes up r goes down productivity goes
down – liv standards go down
2 ways to address budget deficits
Bring g down or raise taxes
Can’t have bother
Raise taxes or lower expenditures
3 ways to fix – reduce liabilities
Taxes have to go up
Borrow more – issue bonds
Print more money
What does alberta have in its heritage trust fund? 18billion
Convert resource wealth into financial wealth
Norway 1.1 trillion
Shouldn’t compare with Norway – 3 reasons
1 – crude oil – Norway sweet oil
2 – low tax alberta Norway very high taxes
3- cost of living – population dense country, condensed and huddled up, economies of scale on
larger scale,
Story of Canada pg. 146
1966 – 1973: – 1.8% productivity
1974-1982: 0.5% productivity
1983-1988: 1.7%
1989-1995: 0.9%
1996-2000: 2.1%
2001-2014: 0.6%
Late 1800: Canadian pacific railroad (CPR), sask = breadbasket of the world, boom in food
prices, Europeans came to farm, boom ends
1914: WWI- USA = recession, export 60% to them, our exports go down, G (gov’t expen.) goes
up  spent $ on war
1918: War ends, things not bad, some debt, house market = good
1929: great stock market crashed  solution: spend a lot, high unemployment (30%), dirty
thirties
1930: great depression – 25% employment
1939: ww2 economy boosted again lowest ever unemployment (2%)
1945: war ended – boomers, women labor force increase, inventions were stopped before war
re-entered market – household appliances
1973 oil prices went up – recession & inflation Stagnation & inflation – stagflation
Inequality
1980s: poverty, many recessions, debt
1996 – IT revolution, budget surplus, lots of $  increased gov’t expenditures, lowered taxes,
paid of lots of debt
2001: dot com
2007: recession, sub-prime mortgage crisis
2011: productivity = low, boomers = retiring  bring more ppl to Canada and raise taxes
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Guest speaker
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Midterm: chapters 6,7,8
Articles we went over
Wizard of oz story
Tax video – tale of three brothers – tax potatoes
Sub-prime mortgage story
Corporate tax cuts article
Adam smith
Price over earnings ratio
Tip from friend stockbroker
Stocks vs bonds over valued under valued
Lec. 19 Midterm
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Lec. 21 (nick’s notes)
3 functions of money:
1. Medium of exchange: money has value b/c there is belief in its worth, enforced vis gov’t)
2. Store of value: money is a store of value, same worth tomorrow as today  good store in the
short-run but not good in the long-run (inflation)
3. Unit of account: how much of this money for that item  n*(n-1)/2
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FMO (foreign market operation): foreign currency
Problem + applications back of chp. 10 p.229 #13
a.
b.
Chapter 11:
Inflation is a monetary phenomenon
6 costs of inflation:
1. shoe leather costs (transaction costs)
2. Menu costs (cost of re-printing menus)  can be avoided with digital menu but still must deal
with disgruntled customers (b/c of cost increase)
3. Inconvenience costs
4. Misallocation of resources
5. Redistribution of income: Inflation = lenders lose in high inflation
6. Inflation induced tax distortions
Liquidity Preference Theory:
demand (Md) = f(P,r,Y,cc,ATM)
(QTM) Quantity Theory of Money: MV = PY
M: money supply
V: velocity
P: prices
Y: GDP (real)
GM + GV = π + g
GM: growth in $ supply
GV: growth in velocity
π: growth in prices
g = growth
V is constant then gv = 0 then gm = π + g
Short run – one fixed (price) gm = g
Long run – y is fixes (output) gm = π
Problems applications chp. 11
Question #1:
a. RGDP x price = NGDP
(500) X price = 1000
price = 2
MV = PY
(50)(V) = (2)(500)
V = 20
b.
gm = π + g
π = -5%
b. 5% = 0 + 5%
c. 15% = 10 + 5%
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Chapter 12
NX= f (P, e, Y, transp cost, free trade agents)
E = for corr/ 1 CAD
NX = NCO
M = K/O - K/I
1. 100$ = 8000 YEN
2. 100$ =
TOKYO SE
3. 100$ - 8000 YEN = 0
China
US
NX > 0
NCO > 0
S>I
Y > EXP
NX < 0
NCO < 0
S<I
Y < EXP
China income is greater than expenditure
E = Ep/ (pf)
See McChicken Problem in notes
PPP (Purchasing Power Parity)  your purchasing power is similar across both countries
1/P = e/pf
e = pf/p
Entrepreneur: buy @ low price  sell @ high price (e.g. ppl selling louis bags from France in japan b/c
they are cheaper in France)
SO buy McChicken in India sell it in Canada BUT:
1. transaction costs (transportation cost, taxes)  more than you will profit
2. imperfect substitutes
3. Doesn’t work for services
Exchange rates
Germany
Italy
1970
3.49
600
2001
1.41
1397
pf decrease
pf increase
Germany’s money supply went down, Italy increased money supply. Why? b/c German’s have fiscal
discipline
IRP (interest rate parity)
Small open economy:
Interest rate Canada (r) = interest rate (world market)
IRP doesn’t work:
1. taxes
2. debt
3. constitutional crisis
Chapter 13