1. Review : Chapters 1 - 5 Copyright © 2014 Pearson Canada Inc.

2. 2 Point d illustrates scarcity; it is unattainable with current resources. Points a and b illustrate choice. They are both attainable, but which one will be chosen? The production possibilities boundary illustrates: scarcity choice opportunity cost The negative slope illustrates opportunity cost. Attainable combinations c a b d Unattainable combinations Quantity of Military Goods Quantity of Civilian Goods Production possibilities boundary

3. 3 4. Is Productive Capacity Growing? Point d was initially unattainable. But after sufficient growth, it becomes attainable. Growth in productive capacity is shown by an outward shift of the production possibilities boundary. a b Quantity of Military Goods Quantity of Civilian Goods Before growth d After growth

4. 4 Normative statements depend on value judgments and opinions -- cannot be settled by recourse to facts. Positive statements do not involve value judgements. They are statements about what is, was, or will be.

5. 5 A change in variables other than price will shift the demand curve to a new position. average household income prices of other products distribution of income or population expectations about the future D0D0 0 20 40 60 80 100 120 140 140120100 80 60 40 20 Quantity of Carrots Y X W V U D1D1 Price of Carrots

6. 6 A change in demand is a change in the quantity demanded at every price -- a shift of the entire curve. A 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. p3p3 p2p2 p0p0 Q3Q3 Q0Q0 Q2Q2 Q1Q1 D1D1 D0D0 Quantity Price

7. 7 A change in any variable other than price will shift the supply curve to a new position. Changes in these variables will shift the supply curve: prices of inputs (raw materials, wages, energy) technology (producing more output with less input) number of firms in industry Expectations about future price Technical ease of substitution in production of product Business 0 20 40 60 80 100 120 140 140120100 80 60 40 20 S0S0 y x w v u Quantity of Carrots Price S1S1

8. 8 A change in supply is a change in the quantity that will be supplied at every price -- a shift of the entire curve. A change in quantity supplied refers to a movement from one point on a supply curve to another point, either on the same supply curve or on a new one. 140120100 80 60 40 20 S0S0 y x w v u Quantity of Carrots Price S1S1 0 20 40 60 80 100 120 140

9. 9 Changes in Market Prices The four “laws” of supply and demand: 1. An increase in demand causes an increase in both equilibrium price and equilibrium quantity. S Price D1D1 D0D0 Q0Q0 Q1Q1 p1p1 p0p0 Quantity 2. A decrease in demand causes a decrease in both equilibrium price and equilibrium quantity. E1E1 E0E0

10. 10 3. An increase in supply causes a decrease in the equilibrium price and an increase in the equilibrium quantity. 4. A decrease in supply causes an increase in the equilibrium price and a decrease in the equilibrium quantity. S1S1 Price S0S0 D Q1Q1 Q0Q0 p0p0 p1p1 Quantity E1E1 E0E0

11. 11  = (Q 1 - Q 0 )/(Q 1 + Q 0 ) (p 1 - p 0 )/(p 1 + p 0 ) how specifically the product is defined The availability of substitutes is determined by: the length of the time interval being considered whether the good is a necessity or a luxury Demand elasticity tends to be high when there are many close substitutes.

12. 12  S = percentage change in quantity supplied percentage change in price the technical ease of substitution in production the nature of production costs the time span under consideration

13. 13  Y = percentage change in quantity demanded percentage change in income  XY = percentage change in quantity demanded of good X percentage change in price of good Y

14. 14 Price Floors S D Price floor Excess supply p1p1 p0p0 Q1Q1 Q0Q0 Q2Q2 Quantity Price E Price floors make it illegal to sell the product below the controlled price. A black market is any market in which goods are sold at illegal prices.

15. 15 Price Ceilings S D Price ceiling Excess demand p1p1 p0p0 Q1Q1 Q0Q0 Q2Q2 Quantity Price E A price ceiling is the maximum price at which a product may be exchanged.

16. Economic Surplus and Market Efficiency Economic surplus is maximized at the competitive equilibrium level of output—the market is "efficient." 16 Copyright © 2014 Pearson Canada Inc. Chapter 5, Slide Total Economic Surplus = Consumer Surplus + Producer Surplus

17. Fig. 5-7Market Inefficiency with Price Controls Change in CS = – (B + D) Change in PS = B – E Change in Total Surplus = – (D + E) This is the "deadweight loss" of the price floor. 17 Copyright © 2014 Pearson Canada Inc. Chapter 5, Slide