ECON 208 - PAST EXAM

ECON 208 - PAST EXAM

Economic Issues and Concepts

Scarcity, Choice, and Opportunity Cost

Scarcity is the fundamental economic problem of having seemingly unlimited human wants in a world of limited resources. Because resources are scarce, choices must be made, and every choice has an opportunity cost—the value of the next best alternative forgone.

• Scarcity: Limited nature of society's resources.

• Choice: Decision-making among alternatives due to scarcity.

• Opportunity Cost: The value of the next-best alternative given up when making a decision.

• Production Possibilities Frontier (PPF): A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.

Example: If a country produces only wheat and steel, the PPF shows the trade-off between the two goods. Moving along the PPF involves shifting resources from one good to another, illustrating opportunity cost.

Economic Theories, Data, and Graphs

Positive vs. Normative Economics

Economists distinguish between positive statements (what is) and normative statements (what ought to be).

• Positive Economics: Objective and fact-based analysis.

• Normative Economics: Subjective and value-based statements.

Graphical Analysis

• Graphs are used to illustrate relationships between variables, such as supply-and-demand curves.

• Shifts in curves indicate changes in determinants other than the variable on the axis (e.g., income, tastes).

Demand, Supply, and Price

Law of Demand and Law of Supply

• Law of Demand: All else equal, as the price of a good falls, the quantity demanded rises, and vice versa.

• Law of Supply: All else equal, as the price of a good rises, the quantity supplied rises, and vice versa.

Market Equilibrium

• Equilibrium occurs where the demand and supply curves intersect.

• At the equilibrium price, quantity demanded equals quantity supplied.

Example: If the market price is above equilibrium, a surplus results; if below, a shortage occurs.

Shifts vs. Movements

• Movement along a curve: Caused by a change in the good's own price.

• Shift of a curve: Caused by changes in non-price determinants (e.g., income, prices of related goods, tastes).

Elasticity

Price Elasticity of Demand

Measures the responsiveness of quantity demanded to a change in price.

• Formula:

$E_d = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}$

• If $|E_d| > 1$, demand is elastic; if $|E_d| < 1$, demand is inelastic; if $|E_d| = 1$, demand is unit elastic.

Other Elasticities

• Income Elasticity of Demand: Measures response of demand to changes in income.

• Cross-Price Elasticity of Demand: Measures response of demand for one good to changes in the price of another good.

Consumer and Producer Surplus

Definitions and Graphical Representation

• Consumer Surplus: The difference between what consumers are willing to pay and what they actually pay.

• Producer Surplus: The difference between the price producers receive and the minimum they would accept.

Both surpluses are maximized at the market equilibrium in a competitive market.

Price Controls and Market Efficiency

Price Ceilings and Floors

• Price Ceiling: A legal maximum on the price at which a good can be sold (e.g., rent control).

• Price Floor: A legal minimum price at which a good can be sold (e.g., the minimum wage).

• Price ceilings can cause shortages; price floors can cause surpluses.

Consumer Behaviour

Utility Maximization

• Consumers allocate their income to maximize total utility, subject to their budget constraint.

• Law of Diminishing Marginal Utility: As more of a good is consumed, the additional satisfaction from consuming an extra unit decreases.

Equimarginal Principle: Utility is maximized when the marginal utility per dollar spent is equal across all goods:

$\frac{MU_x}{P_x} = \frac{MU_y}{P_y}$

Production and Costs

Short Run vs. Long Run

• Short Run: At least one input is fixed.

• Long Run: All inputs are variable.

Cost Concepts

• Total Cost (TC): Sum of all costs incurred in production.

• Average Cost (AC): $AC = \frac{TC}{Q}$

• Marginal Cost (MC): $MC = \frac{\Delta TC}{\Delta Q}$

Market Structures

Perfect Competition

• Many firms, identical products, free entry and exit.

• Firms are price takers; long-run economic profit is zero.

Monopoly

• Single seller, unique product, barriers to entry.

• Monopolist sets price above marginal cost, leading to deadweight loss.

Monopolistic Competition and Oligopoly

• Monopolistic Competition: Many firms, differentiated products, free entry and exit.

• Oligopoly: Few firms, interdependent decision-making, potential for collusion.

Factor Markets and Income Distribution

Labour Markets

• Wages are determined by supply and demand for labour.

• Income inequality can result from differences in skills, education, and discrimination.

Market Failures and Government Intervention

Externalities and Public Goods

• Externality: A cost or benefit imposed on others not involved in the transaction (e.g., pollution).

• Public Good: Non-excludable and non-rivalrous (e.g., national defense).

• Government intervention may be needed to correct market failures.

International Trade

Comparative Advantage and Gains from Trade

• Countries benefit from trade by specializing in goods for which they have a comparative advantage.

• Comparative Advantage: The ability to produce a good at a lower opportunity cost than another producer.

Example Table: Comparative Advantage

Country	Good A (units/hour)	Good B (units/hour)
Canada	4	2
Japan	2	4

Canada has a comparative advantage in Good A; Japan in Good B.

Summary Table: Key Microeconomic Concepts

Concept	Definition	Key Formula
Elasticity of Demand	Responsiveness of quantity demanded to price change	$E_d = \frac{\%\ \text{change in Qd}}{\%\ \text{change in P}}$
Consumer Surplus	Difference between willingness to pay and actual price	-
Producer Surplus	Difference between price received and minimum acceptable price	-
Marginal Cost	Change in total cost from producing one more unit	$MC = \frac{\Delta TC}{\Delta Q}$
Comparative Advantage	Lower opportunity cost in production	-

Additional info: This guide synthesizes core microeconomic concepts, models, and applications, as reflected in the exam questions. It covers foundational topics from the course outline, including supply and demand, elasticity, market structures, consumer and producer theory, market failures, and international trade.