Chapter 1 What's in Economics for You? Scarcity, Opportunity Cost and Trade.

Transcription

1 Chapter 1 What's in Economics for You? Scarcity, Opportunity Cost and Trade. Economics is how individuals, businesses, and governments make the best possible choices to get what they want, and how those choices interact in markets Scarcity (basic economic problem) arises because of limited money, time and energy Opportunity cost (most important concept) because of scarcity, every choices needs a trade off the true cost of giving up the alternative called opportunity cost smart choice = value of what you get, greater than the value of what you give up incentives = rewards and penalties for the choice actions with rewards (positive incentives) are likely chosen than those actions with negative incentives Where Have All the Men Gone? Women make 60% of undergraduate population, and economists have an explanation for it based on opportunity cost. Even though men and women pay the same fees, they benefit differently from it. Men's alternative of not going to college is higher paying blue-collar jobs (eg. Mechanics, construction workers), while women's alternative is lower paid jobs in retail (eg. Clerks, check out assistants). Women with post secondary education earn 50% to 80% more than those with just high school degree, while the difference for men is 25% to 30% percent. According to the differences in opportunity cost women who do not go to college give up a much bigger gain then men do. For women, the benefits of getting a post secondary education are much better than for men. Only 6% of men go back to receive post secondary education while for women it is 9%. Gains from trade Opportunity cost and comparative advantage are key to understanding why specializing and trading make us all better off voluntary trade (buyers and sellers are allowed to buy and sell according to their preferences) absolute advantage: ability to produce a product/service at a lower absolute cost than another producer comparative advantage: ability to produce a product/service at a lower opportunity cost than another producer Opportunity cost = give up : get The circular flow of economic life the circular flow diagram of economic life is a map showing how markets connect us all. It illustrates how smart choices by households, businesses, and governments interact in markets complexity of Canadian economy can be reduced to three sets of players households, businesses, and governments in input markets (labour, natural resources, capital equipment and entrepreneurial ability; where businesses buy the inputs they need to produce products / services) = households are sellers and businesses are buyers in output markets (where businesses sell their products/services) = households are buyers and businesses are sellers governments (the middle between the markets) set rules and can choose to interact in any aspect of the economy Microeconomics: analyzes choices that individuals in households, individual businesses, and governments make, and how those choices interact in markets Macroeconomics: analyzes performance of the whole Canadian economy and global economy, the combined outcomes of all individual microeconomic choices eg. household sells or rents to businesses the labour, resources, capital -> businesses pay wages and other money rewards to households -> businesses produce products/services which they sell to households -> households use money they earned to pay businesses -> people end up with service, businesses end up with the money -> the cycle repeats Weigh marginal benefits and costs: the three key plan of the core of microeconomics: 1. Opportunity cost rule: choose only when additional benefits are greater than additional opportunity cost 2. Look forward only to additional benefits and additional opportunity costs: count only additional benefits and additional opportunity costs; count only marginal benefits and marginal opportunity costs MARGINAL = ADDITIONAL 3. Implicit costs and externalities count too: be sure to count all additional benefits and costs, including implicit costs and externalities Marginal = additional Marginal benefits additional benefits from next choice Marginal opportunity costs additional opportunity costs from next choice Implicit costs opportunity costs of investing your own money or time Negative (positive) externalities costs (benefits) that affect other external to a choice or a trade STUDY GUIDE QUESTIONS 1. Economics is about how individuals, businesses, and governments make the best possible choices to get what they want, and how those choices interact in markets. TRUE 2. People who win the lottery don't have to make smart choices. FALSE because even people who win the lottery can never satisfy all of their wants, they also face trade offs and have to make smart decisions 3. Opportunity cost is equal to money cost FALSE opportunity cost is value (other benefits that are lost in addition to money when given up to path, action or activity 4. In 2007 the Government of Canada announced $1000 Apprenticeship Incentive Grant to cover the costs of tuition, travel, and tools for apprentices in the sealing trades. This will eliminate the opportunity cost of being an apprentice for those who receive the cash grant. FALSE because the grant covers the money costs of getting an apprenticeship but does not cover the opportunity cost the total value of what the individual gives up by taking an apprenticeship, which includes the money that the individual could have earned in a job that year. 5. According to Economics Out There on p.6, men have a larger incentive to get a post- secondary education because not getting a postsecondary education results in a relatively worse outcome compared to women FALSE women are the ones that result in a relatively worse outcome because the gap between the incomes of post secondary graduates and high school gradates is higher for women then for men

2 6. Traditionally, women have specialized in unpaid work at home and men have specialized in paid work outside the house. One possible explanation for this could be that men held a comparative advantage in performing housework (for example: cooking, cleaning, and child care) FALSE because if men held a comparative advantage in performing housework then traditional gender roles would be reversed because individuals are supposed to specialize in the activity where they hold a comparative advantage. 7. The theories of comparative advantage, specialization, and trade in this chapter are consistent with the belief that opposites attract TRUE 8. Sheryl and Darrel are trying to decide who should stay at home to take care of their newborn chid and who should continue to work full time outside the house. Sheryl makes $30 an hour and Darrel earns $26. If both are equally effective at taking care of the child, then based on opportunity costs Sheryl should stay at home to take care of the newborn. FALSE if they are both equally productive when staying with the newborn, then Sheryl should work cause she earns more money 9. The proportion of families with both parents working outside the home and sharing child care responsibilities has risen in recent decades. This indicates that specialization and the traditional division of gender roles are becoming much less common in Canada. TRUE 10. Government programs that make child care more affordable, such as Quebec's $7 a day child-care program, would likely increase the proportion of parents who work outside home. TRUE 11. The labour market where employers demand labour and employees supply labour is an output market. FALSE this is an input market because households are sellers, and businesses are buyers 12. In input markets, households are sellers and businesses are buyers, in output markets, households are buyers and businesses are sellers TRUE 13. Decisions to go to college or take out a loan are macroeconomic choices. FALSE, it's microeconomic choices because they focus on individuals making decision, whenever macro focuses on a bigger picture country or global wise 14. Implicit costs are the opportunity costs of investing your own money or time TRUE 15. Negative externalities are benefits that affect others external to a choice or a trade FALSE they are the costs that affect others 1. You can't get everything you want because you are limited by: (d) time, money, energy 2. Scarcity is: (d) a challenge for everyone 3. Economics does not focus on: (b) animals 4. Opportunity cost includes: (d) time you give up, energy you spend, money you spend 5. In deciding wether to study or sleep for the next hour, your decision should consider all of the following except: (a) how much tuition you paid, (b) how tired you are (c) how productive you will be in that hour (d) how much value you place on sleeping in that hour over 6. From 1991 to 2001, the proportion of 25 to 29 year old women with university degrees rose from 21 percent to 34 percent, while the proportion of 25 to 29 year old men with degrees rise from 16 percent to 21 percent. There is a similar trend for college diplomas. More women than men are getting post secondary eduction because: (d) the gap in pay between post secondary and high school graduates is higher for women than it is for men, the cost of not going to post-secondary education is higher for women, the opportunity cost of going to post secondary education is lower for women 7. According to the table all of the following statements are true except: Median Annual Earnings Men Women College Diploma $51, $43, High-School Diploma $37, $32, (a) people with college diplomas earn more than people with high school diplomas (b) men with high school diplomas earn more than women with high school diplomas (c) men with college diplomas earn more than women with college diplomas (d) women with high school diplomas earn more than men with high school diplomas 8. If the resource-rich sector of Alberta's economy starts to slow down, (b) opportunity costs of upgrading to a college diploma will decrease (decrease = less will be gained from choosing to receive a college diploma) 9. Mutually beneficial gains from trade come from: (b) comparative advantage 10. The easiest way to calculate opportunity cost is: (a) to divide what you GIVE UP by what you GET 11. Which of the following is not a microeconomic choice for businesses? (a) what interest rates to set (b) what products/services to supply (c) what quantity of output to produce (d) how many workers to hire 12. Which of the following is not a microeconomic choice for governments? (a) increasing tuition rates (b) taxing automobile emissions (c) increasing the exchange rate of the canadian dollar (d) increasing the number of taxi licences 13. In the circular-flow diagram, (d) households ultimately own all the inputs of an economy, governments set the rules of the game, businesses are sellers and households are buyers in output markets 14. All of the following should be considered when making smart choices, except (a) external costs and benefits (b) past costs and benefits (c) implicit costs (d) additional costs and additional benefits 15. For any activity, failure to consider (d) external costs will result in too much of that activity 1. You're trying to decide whether to go camping with your friends or spend a quiet weekend at home with your significant other. What incentives (think rewards and penalties), if changed, may influence your decision? Weather, cost of trip, if your partner tells you the relationship is over if you go, if your partner offers to cook for you or take you out to dinner if you stay 2. Olga chooses to live at home rather than move into residence during her first year of college. She often brags about the fact that she saves a lot of money by living at home. Provide some examples of what Olga may have given up by choosing to live at home. Meeting new people and making friends (social life), not spending money on transportation (residence is probably located on campus), time (living in residence is convenient because food is provided, rooms are cleaned, and less time needs to be spend on moving around), parties, freedom, privacy, study partners 3. Suppose the government was worried about the decline of young men in post-secondary education. What incentives might encourage more men to pursue further education? Decreasing tuition costs or guaranteeing minimum pay levels for people with degree

3 4. You friend has an extra ticket to the Calgary Flames Ottawa Senators game on a Saturday night. He says he will give you the ticket for free if you pay for all the other expenses. You usually work Saturday nights, so if you go you will have to take the night off work. Explain what costs you would include in deciding whether or not to go to the free game. The costs of transportation and food, in addition, to the opportunity cost which the loss of the money that could be earned in that night 5. Seat belts save lives. Suppose that a city doubles the penalty for being caught driving without a seat belt in attempt to increase seat belt use among drivers. (a) Explain how this policy will influence driver behaviour More people will start wearing seat belts, because the fine for it is doubled, and their opportunity cost for driving without a seat belt is greater than the opportunity cost for driving with it (b) Now suppose the city evaluates the policy and finds that the number of fatalities actually increased after the policy was introduced. Can you think of a reason why this may have occurred? Drivers begin to drive more dangerously because since wearing the seatbelt is so important it must make them safe. 6. Consider Jacqueline and Samantha from Section 1.3, who specialize and trade to become better off. Suppose that Jack, and person in town, is deciding between specializing )in either bread or wood) and being self-sufficient. Jack's production possibilities are illustrated below: Jack's Production Possibilities (monthly) Bread (loaves) Wood (cords) If Jack chooses to be self-sufficient, he prefers spending his month making 20 loaves of bread and cutting 75 cords of wood. Determine who has the comparative advantage between a) Jack and Jacqueline In order to calculate the opportunity cost we take what we give up and divide (:) by what we get. The opportunity of Jack spending all his time making bread (expressed per unit of what he gets) is 105 (cords of wood that he could make) :70 (loaves of bread that he makes) = 3/2 cords of wood (opportunity cost for producing only bread) The opportunity cost of Jack spending all his time making wood is 70:105 = 2/3 loaves of bread The opportunity cost of Jacqueline spending all her time making bread is 100:50 = 2 cords of wood The opportunity cost of Jacqueline spending all her time making wood is 50:100 = 1/2 loaves of bread From this, Jack has a comparative advantage in making bread and Jacqueline has a comparative advantage in chopping wood b) Jack and Samantha Jack spending all his time making bread: opportunity cost = 3/2 cords of wood Jack spending all his time making cords: opportunity cost = 2/3 loaves of bread Samantha spending all her time making bread: opportunity cost = 20:40 = 1/2 cords of wood Samantha spending all her time making cords: opportunity cost = 40:20 = 2 loaves of bread From this, Samantha has a comparative advantage in producing bread and Jack has a comparative advantage in producing cords. 7. Before trade Jack decide that he is best at producing 20 loaves of bread and 75 cords of wood. Since, Jack has a competitive advantage over Jacqueline in making bread that's what he would specialize in. After trading with Jacqueline he would end up with 50 loaves of bread and 20 cords of wood, and that would be worse than what he could achieve by being self-sufficient because for the same amount of bread, he can produce 30 cords. Since Jack has a competitive advantage over Samantha in chopping wood, then he would only specialize in wood. After trading with Samantha he would end up with 20 loaves of bread and 85 cords of wood, in which cases he produces the same amount of bread but gains extra 10 cords of wood. Therefore, Jack would choose to go into partnership with Samantha. 8. Back in the old days, professors and students could smoke in the classrooms. Today, smoking indoors in public places is illegal. (a) provide an example of an external cost that indoor smokers fail to consider when deciding to light up inside the classroom Internal cost that they do not consider when lighting up a smoke, is the damage of the health of people who do not smoke and do not want to be exposed to smoke, and the harm it brings to their health, maybe then then they would realize that the cost of smoking inside exceeds the benefit they earn from it over the others (b) Do you think that those who smoked indoors considered the external cost in their decision to smoke? Why or why not? No, people do not take external cost as a reason for not doing an activity, and therefore they only care about their needs and wants because they keep on smoking indoors (c) Another way to discourage smoking is to tax the activity. If people respond to incentives, how would we expect smokers to adjust behaviour in response to an increase in a cigarette tax? In response to an increase in a cigarette tax, people would be expected to reduce the amount of cigarette packs they buy because prices would rise but their money would still be limited like it was before they rose. 9. Mrs. And Mr. Singh are encouraging both their son and daughter to get a full-time job right after completing high school. According to what you learned from Economics Out There on p. 6, which child should they encourage less to go to work? The daughter should be encouraged less to go to work because the earnings she will make with a high school education are smaller to what their son would make with the same education, and by achieving the college degree she would make way more money, whenever the difference for their son would not be significant if he pursues a college degree. 10. From a social point of view, external costs should be included in making smart decisions, but sometimes they are not. In each of the following examples, determine whether the market economy (in the absence of government policy) would result in too few or too many products/services being produced. Then describe one policy or program that the government has in place to force individuals to consider these costs or benefits when they make decisions. (a) pollution levels too much pollution government enforces carbon taxes, fines for cars that do not pass emission tests (b) smoking levels too high government enforces cigarette taxes, smoking indoors is prohibited by law

4 (c) education levels too little education tuition subsidies, loans for students who are stopped from education because of limited money resources, scholarships to motivate students to do better, sponsoring education centres to be able to supply their students with education Chapter 2 Making Smart Choices. The Law of Demand. Economics is not about money but rather about how individuals, businesses and governments make the best possible choices to get what they want. Smart choices produce happiness, and help governments to spend their tax dollars wisely. Three Keys to Smart Choices are most important for distinguishing smart choices from not-smart. Economists use the term demand to summarize all of the influences on consumer choice. Weighing benefits, costs and substitutes willingness to buy a product or service depends on your ability to pay comparative benefits and costs, and the availability of substitutes Preferences your wants and their intensities Demand consumer's willingness and ability to pay for a particular product/service for any choice, what you are willing to pay or give up depends on the cost and availability of substitutes Cost always means opportunity cost what you are willing to give up Smart choices are marginal choices key to smart choices: count only additional benefits and additional costs. Additional benefit means marginal benefit not total benefit and marginal benefit changes with circumstances Marginal benefit ( on or at the edge ) additional benefit from a choice, and changes with circumstances Marginal benefit explains the diamond/water paradox (benefit or satisfaction?). Why do diamonds cost more than water, when water is far more valuable for survival? Willingness to pay depends on marginal benefit, not total benefit. Because water is abundant (there are large quantities) and cheap, marginal benefit is low (because even though water is a key to survival and a person would pay anything they have for it, its large quantity and low price make the marginal benefit low even though the total benefit is huge). Because diamonds are scarce, marginal benefit are high (there are just few diamonds in the world compared to the amount of water supplies), even though the total benefit is low because the supplies of diamonds is limited. Making smart choices means living life on the edge Marginal benefit is important not only for making smart choices but also for explaining how prices are determined in the real world Coke's Automatic Price Gouging: In the late 1990's Coca Cola came up with an idea that on the hot summer days, prices in vending machines should rise because people will be willing to pay more. The plan failed because people could not accept an idea of paying for more. However, the concept is correct according to the principal of marginal benefit whenever willingness to pay changes with the circumstances. Also, if Coca Cola would introduce this, people would also have a choice for a substitute (Pepsi) because substitutes limit willingness to pay for any product. The law of demand A RISE IN PRICE = DECREASE IN QUANTITY DEMANDED A FALL IN PRICE = INCREASE IN QUANTITY DEMANDED Consumers economize on products or services that become more expensive by switching to substitutes. Quantity demanded (amount you actually plan to buy at given price) is not the same as demand (consumer's willingness and ability to pay for a particular product/service). eg. you are willing to pay $150 for ipod Nano, so your quantity demanded is 1 Market demand sum of demands of all individuals willing and able to buy a particular product or service The inverse relationship (when one goes up, the other goes down) is called Law of demand if the price of a product or service rises, quantity demanded decreases Law of demand works as long as other factors besides price do not change. Because there are substitutes for everything, higher prices create incentives for smart consumers to reduce their purchases of more expensive products or services and look for alternatives. What happens to your buying decision when the additional cost (what you pay changes)? YOUR DEMAND (price that you are willing to pay affecting quantity demanded) 1. (eg. Initial price of the ipod is $150, the quantity demanded at that price is one. If the ipods price would rise to $175 from $150, the additional $25 added would make a person look at the substitutes available. If the price would rise up all the way to $225 and initially you were willing to pay $150, the quantity demanded would become zero. If the price of an ipod would go down to $75, a person might decide to get one for himself and one for his gf, the quantity demanded would become two.) Therefore, when something becomes more expensive, people economize on its use. MARKET DEMAND FOR WATER (inverse relationship between price and quantity demanded for the market demand for water) 2. (eg. When the City of Toronto used to pay a flat monthly rate for water, people could use as much water as they wanted, basically wasting it.(eg. Sweeping their sidewalks with water). Once people had to start paying for the amount of water they used, they started substituting sweeping with water to using a broom, taking showers instead of taking a bath. Only economists could substitute water with brooms. If water is priced $1 per cubic meter, quantity demanded is 5; if water is priced $3 per cubic meter, quantity demanded is 1) With a higher price for water, the quantity demanded decreased. What can change demand? Quantity demanded is changed only by a change in price. Demand is changed by all other influences on consumer choice. Demand is a catch-all term summarizing all possible influences on consumers' willingness and ability to pay for a particular product or service Increase in demand increase in consumers' willingness and ability to pay Decrease in demand decrease in consumers' willingness and ability to pay TO SUMMARIZE, changes in demand:

5 Decreases if: preferences decrease, price of substitute falls, price of a complement rises, income decreases (normal good), income increases (inferior good), expected future price falls, number of consumer decreases Increases if: preferences increase, price of a substitute rises, price of a complement falls, income increases (normal good), income decreases (inferior good), expected future price rises, number of customers increases 5 FACTORS that can change MARKET DEMAND: 1. Increasing preferences - (eg. Due to advertising, the desire for having the ipod has increased, and if before a person was willing to pay $150 for one, now he is willing to pay $200. An increase in demand happened (willingness to pay and the intensity of the want increased) because people's marginal benefit and the willingness to pay increased, without changes in the ability to pay) - (eg. If Health Canada would announce that listening to the ipod harms people's health, consumers willingness and ability to pay would decrease and result in decrease in demand) - an increase in preferences causes increase in demand, a decrease causes the decrease in demand 2. Prices of related goods - There are two types: - substitutes (products and services that can be used in place of each other to satisfy the same want) - complements (products and services that tend to be used together to satisfy the same want), eg. Cars + gasoline, hot dogs + hot dog buns - A fall in the price of a complement causes an increased demand for the related product because the cost of using both products together decreased. 3. Income - increase in income, causes increase in demand - the intensity of the wants does not change with greater income - higher incomes, lower the opportunity costs - Normal goods: products or services that you buy more of when your income increases (an INCREASE in income causes INCREASE in demand, and the opposite otherwise, eg. Ipod) - Inferior goods: products or services that you buy less when your income increases (a DECREASE in income causes an INCREASE in demand, and otherwise eg. decrease in income = $1 noodles or soup, increase = $15 meal at a restaurant or a home made meal) - demand of inferior goods increases in the downfall of economy when the unemployment rate rises, and people cut down on their food budget 4. Expected future prices - expected future price fall causes a decrease in demand - expected future price rise causes an increase in demand - consumers choose between substitutes, and one of many possible ones is purchasing tomorrow for purchasing today (eg. Gas on the weekend is more expensive, than on the week day, then the person will choose to wait until the week day because they expect future price fall) 5. Number of consumers - increased number of consumers causes increase in demand, decreased number causes decrease - for each price, if the number of consumers increases, all the quantities demanded by all consumers at that prices have to be added together - at any given price, consumers plan to buy a larger quantity - at any given quantity demanded, consumers are willing and able to pay a higher price Why the quantity of gasoline bought has increased when the price for it went up from $.99 to $1.36? Ac. to the law of demand (change in quantity demanded), the quantity sold should have decreased when the prices rose. Therefore, there was a change in demand. An increased number of drivers and cars (caused by higher incomes, strong advertising campaigns and high amount of consumers, increased the demand for gasoline, outweighing the impact of the decrease in quantity demanded. Price elasticity of demand and total revenue elasticity measures how responsive quantity demanded is to a change in price, and determines business pricing strategies to earn maximum total revenue. To earn maximum total revenue, businesses cut prices when demand is elastic and raise prices when demand is inelastic The tool that businesses use to measure consumer responsiveness when making pricing decisions is elasticity (or price elasticity of demand), which measures by how much quantity demanded responds to a change in price The FORMULA is: where Є = in Price Elasticity of Demand= PERCENTAGE CHANGE QUANTITY DEMANDED PERCENTAGE CHANGE PRICE The formula assumes that all of the other five factors that can affect demand are unchanged, so this is controlled measurement of just the relationship (in the law of demand) between quantity demanded and price eg 1. for insulin, if a 10% rise in price causes a 2% decrease in quantity demanded, the calculation is: Price elasticity of demand for insulin = 2% : 10% = 0.02 : 0.1 = The percentage change in quantity in the numerator (2) is less than the percentage change in price in the denominator (10), the value for elasticity is less than 1. ANY elasticity value less than 1 = inelastic eg 2. for yellow tennis balls, if a 10% rise in prices causes a 50% decrease in quantity demanded, the calculation is: Price elasticity of demand for insulin = 50% : 10% =0.5 : 0.1 = 5 - The percentage change in quantity in the numerator (50) is greater than the percentage change in price in the denominator (10), the value for elasticity is more than 1. ANY elasticity value more than 1 = elastic THEREFORE: elasticity less than 1 = inelastic, elasticity more than 1 = elastic Inelastic for inelastic demand, small response in quantity demand when price rises Eg. Demand for insulin by a diabetic Value for formula is less than one Low willingness to shop elsewhere Elastic for elastic demand, large response in quantity demanded when price rises Eg. Demand for yellow tennis balls Value for formula is greater than one High willingness to shop elsewhere The price elasticity of demand of a product or service is influenced by:

6 substitutes more substitute goods means more elastic demand time to adjust longer time to adjust means more elastic demand proportion of income spent on a product or service greater proportion of income spent means more elastic the demand is TOTAL REVENUE (all money a business receives from sales) = price per unit (P) multiplied by quantity sold (Q) When Demand Is: Elastic [ > 1 ] Inelastic [ < 1 ] % in change in Quantity sold > % change in Price per unit % in change in Quantity sold < % change in Price per unit Increased total revenue Decreased total revenue When demand is unit elastic (=1), the percentage increase in quantity equals the percentage decrease in price, so total revenue remains the same price cuts are the smart choice facing elastic demand and increase total revenue (meaning, lower price for each unit sold, is made up on the greater volume sold, so revenue increases) price rises are the smart choice facing inelastic demand, and increase total revenue (meaning, higher price for each unit sold leads to the loss of some sales but the percentage increase in price is greater than the percentage decrease in quantity, so total revenue increases) All business have to live by the law of demand a rise in price causes a decrease in quantity demanded. Smart business choose their price points depending on how much consumers' quantity demanded responds to a change in price in other words, on price elasticity of demand. STUDY GUIDE QUESTIONS 1. Demand is the same as wants. FALSE demand means willing and able to pay 2. Your willingness to pay for a product depends on what substitutes are available, and what they cost. TRUE 3. Marginal cost is the same as additional cost. TRUE 4. The flat fee charged at an all-you-can-eat restaurant should not influence how much food you eat once you are seated. TRUE 5. Marginal benefit is always equal to average benefit. FALSE because marginal benefit will equal to average benefit only in special circumstances, like, if a basketball player with a shooting percentage of 50% successfully makes one out of her next two shots, then the additional points she adds are equal to the amount of points she usually (on average) adds. 6. Quantity demanded is the same as demand. FALSE quantity demanded is much more limited term than demand. Only a change in price changes quantity demanded. A change in any other influence on consumer choice changes demand. 7. If the price of a product/service changes, that affects quantity demanded. TRUE 8. If your willingness to pay decreases, there will be a decrease in demand. TRUE 9. If your ability to pay decreases, there will be an increase in demand. FALSE for normal goods but TRUE for inferior goods 10. Throughout the month of December, the quantity of video games consoles purchased often increases even as the price rises. This violates the law of demand. FALSE, because of holidays coming up, people's willingness and ability to pay for certain products and services increases, for any given price. Therefore, an increase in demand drives the rising prices 11. When customers react quickly to a price change, this product has high elasticity of demand. TRUE 12. Any elasticity value less than 1 is considered to be inelastic. TRUE 13. The fewer substitutes available, the greater elasticity of demand. FALSE, with fewer substitutes available, it is hard to switch from product to product, so the demand becomes less responsive (people do not react to price change) and less elastic (there is a small response for the price rise because there are no substitutes). 14. When negotiating a price on an expensive purchase, you want the dealer to believe that your demand is elastic meaning, you are willing to shop elsewhere if you don't get a low price because good substitutes are available. TRUE 15. Total revenue (P x Q) decreases when a business lowers the price of an inelastic good. TRUE 1. Economists describe the list of your wants and their intensities as: (d) preferences 2. Costs are (b) whatever we are willing to give up 3. All-you-can-eat buffet restaurants charge a fixed fee for eating. With each plate that Anna consumes, she experiences: (c) decreasing marginal benefits to eating because the unlimited amount of food, makes her eat more than she wants, and then satisfaction turns into the opposite 4. Thinking like economists, a dating couple should break up when the: (d) additional costs of dating are greater than the additional benefits of dating 5. Peter would like to have two cars, one for everyday and the other for special occasions. However, he has only $10,000, so he buys only one car. His quantity demanded of cars is (a) 1 6. When the price of a product rises, (c) consumers look for cheaper substitutes 7. If home owners were charged for garbage collection on the basis of the number of garbage bags used, this would result in (d) decrease in quantity demanded 8. What of the following is most likely to be an inferior good? (a) fast food (b) antique furniture (c) school bags (d) textbooks 9. Demand (c) changes with income 10. If the price of cars went up, the demand for tires would (b) decrease 11. Which of the following could cause an increase in demand for a product? (a) increase in income (b) decrease in income (c) increase in the price of a substitute (d) all of the above 12. If Kraft Dinner is an inferior good, then a rise in the price of Kraft Dinner will cause (d) decrease in the quantity demanded for Kraft Dinner 13. If a business lowers prices, total revenue increases if price elasticity of demand is (b) greater than The fact that butter and margarine are close substitutes makes (a) demand for butter more elastic 15. After visiting a number of restaurants in Paris where fee-for-service toilets are commonplace, a Canadian restaurant owner decides to charge customers a fee for bathroom use. How will bathroom use inside the owner's restaurant most likely change? (c) quantity demanded will decrease, total revenue will rise 1. A smart choice is considering only marginal costs and benefits of the decision, ignoring all the sunk costs.

7 2. If I do not have enough money to buy a product, I cannot have the demand for it because the demand is a willingness and an ability to pay, so when I can't pay, my ability doesn't exist. 3. Consider the diamond/water paradox diamonds are very expensive but not required for life, but water, a necessity for life, is relatively inexpensive. Water is scarce in the desert, so its marginal benefit is very high, while having pockets full of diamonds which make the marginal benefit of having them decrease. 4. Advertising is designed to increase your preference for a product/service. Nike commercials, showing how easily people move around wearing their products, increased my preference for the brand and their slogan Just do it, gets stuck in the head, and only works towards increasing the desire for the product. 5. Suppose your community council is considering the idea of returning to a flat monthly rate payment scheme for water usage. Explain what will happen to the demand for the following products: (a) water demand will increase because consuming additional water doesn't cost more money (b) orange juice demand will decrease because water, a substitute, is now cheaper (c) soap demand will increase because water, complement product, is now cheap, and will allow longer showers and baths (d) rubber ducky bath toys demand will increase because it's a complement product to soap, and water 6. (a) The impact of building a new apartment on the demand for groceries at local store the number of consumers factor will cause change in demand (b) The impact of downloading music on the demand for CD's prices of related products and services factor will cause a change in demand (c) The impact on the demand for cars of delaying buying expensive items in anticipation of a future decrease in the GST expected future prices factor will cause a change in demand 7. Young drivers account for more than 35 percent of all drivers involved in fatal accidents, despite representing only 20 percent of all licensed drivers. Often, alcohol is involved. Explain how each of the following policies would affect the demand for alcohol. (a) Increasing the minimum age for drinking the demand would decrease (b) Raising the price (through higher taxes of alcohol) decrease in quantity demanded (c) Using advertising campaigns to discourage alcohol usage the demand would decrease 8. Demand for the following products is elastic or inelastic? (a) pimple medication elastic; (b) pencils elastic (c) clothes inelastic (d) parasuco jeans elastic (e) newspaper elastic (f) toilet paper inelastic 9. Evidence suggest that babies are a normal good for lower income earners and an inferior good for higher income earners. Explain what this means by using the definitions normal and inferior goods. Lower income earners respond to increases in income by having more children. Higher income earners respond to increases in income by having fewer children. 10. In the women's clothing market, which is likely to be more inelastic, demand for the latest fashions or demand for clothing in general? Use your answer to explain why when clothing stores have sales they usually exclude the latest arrivals. Demand for the latest fashions is more inelastic than demand for clothing in general. Shoppers are willing to pay higher prices for the latest fashions, but will snatch up older fashions if the price is right.