13 Final Review Intro Econ C L Mattoli

13: Final Review Intro Econ C. L. Mattoli

Intro n n This will be a final review of intro econ. We warn that this is by no means all that might be tested in the final exam. It is simply meant as a summary of the course, giving it all in one place with tying threads among the concepts. Study the book, the lecture notes, the tutorials, and the past final exams as a means of studying for the final exam. (C) Red Hill Capital Corp. , Delaware, USA 2008 2

Mod 1: intro: Chapters 1, 2 & 18

Overview n n n Chapter 1 introduces the idea of economics as a social science that tries to be scientific by employing the scientific method of research, when it can do that. We talk about scarcity versus unlimited self-interested wants. In Chapter 2 we look at production possibilities and its frontier (PPF). (C) Red Hill Capital Corp. , Delaware, USA 2008 4

Overview n n n Because resources, including the labor hours available in any given period, are scarce, only a certain amount of one thing could be produced in an economy over a given interval of time. That is maximum production capacity. If the economy wants to produce 2 goods, the scarce resources will have to be divided among production of the 2 goods. How that decision is arrived at is a function of opportunity cost considerations. (C) Red Hill Capital Corp. , Delaware, USA 2008 5

Overview n n n The only way to expand a PPF is through investment in new capital. To do that it will have to give up producing consumer goods to produce more capital goods, which means present sacrifice to get future benefits, another trade-off of opportunities In Chapter 4, international trade, we also found that an economy can get to a point beyond the PPF by comparative advantage in international trade. (C) Red Hill Capital Corp. , Delaware, USA 2008 6

Chapter 1: intro n n n There is not an unlimited amount of anything in the world, so resources (factors of production) for making things are scarce. Economics is the study of choice in the allocation of scarce resources. The resources are land, labor, and capital (equipment). Entrepreneurs, the people who take the risk and burden of doing business, are a particularly scarce resource. (C) Red Hill Capital Corp. , Delaware, USA 2008 7

Chapter 1: intro n n n It uses the scientific method to try to come up with simple theories and equations (models) that are based on simple underlying psychology of human beings. For example, we would expect that people will be willing to buy more of something, if the price is decreased. That becomes a demand curve of quantity versus price that is downward sloping. (C) Red Hill Capital Corp. , Delaware, USA 2008 8

Chapter 1: intro n n n Models use ceteris paribus, everything else held constant, many times, so that the affect of one or a few variables at a time can be examined. Thus, for example, downward-sloping demand assumes that the prices of substitutes does not change. Problems in theorizing include: causation versus correlation. Things might seem to be related, but it might be only a coincidence. (C) Red Hill Capital Corp. , Delaware, USA 2008 9

Chapter 1: intro n n n Then, there is positive versus normative economics. Positive deals with facts and verifiable true-false statements. Normative is subjective and talks of what it thinks things should be like. Thus, GDP will increase, if people work more hours is positive. Poor people should get more money from the rich is normative (C) Red Hill Capital Corp. , Delaware, USA 2008 10

Chapter 2: PP & OC n n n 3 fundamental questions: what, how, and for whom to produce. That brings us to our first discussion of opportunity costs. Scarcity means that choices must be made, and to choose one path is to sacrifice taking another path. Opportunity cost is then defined as the best alternative that was sacrificed in choosing to do what we chose. For example, give up producing one car to make 20 computers, then, your opportunity cost of producing 1 computer is 1/20 cars. (C) Red Hill Capital Corp. , Delaware, USA 2008 11

Chapter 2: PP & OC n n Economic analysis also involves marginal thinking. What is important to dynamic analysis of a productive economy is change. Marginal analysis is our first look at change: additions or subtracting, incremental affects, to a current situation. For example, a farmer figures that he can get $75/acre without fertilizer, and the same land will yield $100/acre with fertilizer. The incremental cost of using fertilizer is $20/acre, so by using it, he will make $100 – $75 – 20 = $5/acre marginal profit by using fertilizer. (C) Red Hill Capital Corp. , Delaware, USA 2008 12

Chapter 2: PP & OC n n n Then, we can finally look at the PPF. The PPF is the plot of maximum capacity simultaneous production of 2 (or more) goods or services (G&S). With limited resources, we will have different combinations of producing different numbers of the pair of good, together. Those maximums are the PPF (see slide below), it is an outer boundary line on the production possibilities set, which are the points inside the outer boundary (not max capacity). (C) Red Hill Capital Corp. , Delaware, USA 2008 13

Chapter 2: PP & OC n n n Points inside the PPF are also possibilities, but they are not efficient because you could have produced more of both with your capacity and trade-offs. If we produce 2 goods, we have to allocate some of the fixed resources to both. For example, we start with 100% of production in good A, then we begin to allocate a larger and larger percentage to good B until we have all of our production in good B. (C) Red Hill Capital Corp. , Delaware, USA 2008 14

Production Possibilities, Graphically A Units of Good 2 • The graph describes the production possibilities for 2 goods or services, with production of each on the separate axes. • The Production possibilities set is contained to the left of the PPF. • Thus, Points A, B, C, D, and F are part of the set, while E is unattainable. • A, C, and F are on the frontier, which represents maximum production, although of different mixes of goods and services. • Point E is beyond the possibilities, given the resources and technology of the economy in the period described in the graph. C E B D (C) Red Hill Capital Corp. , Delaware, USA 2008 F Units of Good 1 15

Chapter 2: PP & OC n n n We get our first chance to look at marginal analysis. That reallocation from only one to 2, in various proportions, will involve opportunity cost considerations. To get that PPF plot, we assume fixed, fully utilized resources and unchanged technology. (C) Red Hill Capital Corp. , Delaware, USA 2008 16

Chapter 2: PP & OC n n n As happens in cases of other costs, marginal opportunity costs change. Thus, PPF is a concave curve because of the law of increasing opportunity costs. The more we move from producing one good to producing more of a second and less of the first, the sacrifices become larger and larger. (C) Red Hill Capital Corp. , Delaware, USA 2008 17

Increasing Opportunity cost example n n n Consider the choice between producing automobiles or university degrees (U. D. ). At point A all production is devoted to autos. Auto production requires a large amount of purpose-built equipment, computers, and some moderately educated labor University degree production requires some buildings, computers, and highlyeducated personnel. (C) Red Hill Capital Corp. , Delaware, USA 2008 18

Increasing Opportunity cost example n n n To move from A to B we move some buildings, computers and educated personnel from auto production to U. D. production, and sacrifice one grid-unit of autos to produce about 2 1/3 grid-units of U. D. ’s. However, to move from B to C we sacrifice the same amount of autos as in the first step to produce less U. D. ’s. Even less, in steps from C to D and D to E (see next slide). (C) Red Hill Capital Corp. , Delaware, USA 2008 19

Autos vs. University Degree production n Recall that on the PPF, all factors of production are fully employed, so that by the time we have gone from A to E all of the capital and laborers have been moved from autos to university degrees. However, some of those resources, like unskilled labor and robots, were better suited to auto making than U. D. production. Thus, at first those well-suited to U. D. production were moved. However, more and more resources that were better suited to autos are moved to U. D. ’s and we have to sacrifice more auto production for incremental U. D. production. A B C D Autos n (C) Red Hill Capital Corp. , Delaware, USA 2008 U. D. ’s E 20

Law of increasing opportunity cost explained n n In this example, because the factors of production are not equally suited to autos and U. D. ’s, the marginal addition of U. D. production for each equal decrease of auto production decreases. In another way of looking at it, the slope of the line ΔA/ΔU is negative and becomes more negative as we move down the curve. (C) Red Hill Capital Corp. , Delaware, USA 2008 21

Law of increasing opportunity cost explained n n We give up producing cars (negative) to make more U. D. ’s (positive), so slope is negative In fact, in a case where the factors of production were equally suited to production two outputs, the PPF would be a straight line and a straight line has a constant slope (Constant opportunity costs). (C) Red Hill Capital Corp. , Delaware, USA 2008 22

Chapter 2: PP & OC n n n To move the PPF out (expand it) means investing in capital because newer better capital will allow greater productive capacity. New technology is particularly helpful in moving PPF’s outward. Another means is by increasing resources, like finding gold or having an influx of employable population. (C) Red Hill Capital Corp. , Delaware, USA 2008 23

Chapter 2: PP & OC n n A means of reaching a point above the PPF is by using comparative advantage in the production of one good to trade for another from another economy, in foreign trade. Comparative advantage means that one country can produce a good at a relatively lower opportunity cost than other nations. (C) Red Hill Capital Corp. , Delaware, USA 2008 24

Trade and the PPF n n n Assume 2 countries that produce the same 2 goods: agricultural products and electronics. Further assume, for simplicity, that their resources are equally suited for both industries, so that the PPF’s of each are linear, i. e. , straight lines instead of curves. Econ 1 starts at B, producing 60, 000 tons of agricultural goods and 20, 000 tons of electronics. Econ 2 starts at D, producing 30, 000 tons agricultural goods and 10, 000 tons electronics. (C) Red Hill Capital Corp. , Delaware, USA 2008 25

Trade and the PPF n n n We assume that points along the PPF’s also describe the consumption possibilities of the country in a closed self-sufficient system without trade. If each specializes, Econ 1 producing only agriculture, and 2 producing only electronics, they can trade the excesses and each can go beyond their PPF’s. Then, econ 1 will produce 100, 000 tons of agricultural goods and economy 2 will produce 50, 000 tons of electronics. (C) Red Hill Capital Corp. , Delaware, USA 2008 26

International Trading PPF’s n n n Econ 1 trades 30, 000 tons of agricultural goods for 20, 000 tons electronics from Econ 2. Economy 1 ends up with 70, 000 tons of agricultural goods and 20, 000 tons of electronics, more than they would have had on their own. Similarly, economy 2 ends up with 30, 000 ton of agricultural goods and 20, 000 tons of electronics, again, beyond what they could have done on their own Both move beyond their PPF’s to B’ and D’. See figure, below Econ 1 Econ 2 A Ag. 20, 000 tons/day n B’ with trade B without trade C D without trade D’ with trade (C) Red Hill Capital Corp. , Delaware, USA Electronics 10, 000 tons/day 2008 27

Chapter 18: Int’l. Trade n n n We all specialize in something, and the economy benefits from specialization: we produce more than we would, if we all did everything for ourselves. We saw that nations can gain from the use of comparative advantage in international trade. There is also the concept of absolute advantage. Absolute advantage means that a nation can produce something using fewer resources than any other country. However, even a nation with absolute advantage in a number of goods can benefit from trading. (C) Red Hill Capital Corp. , Delaware, USA 2008 28

Mod 2: Markets

Chapter 3: market analysis n n n One efficient and effective means of allocation is by markets. In markets, there is consumer sovereignty: the consumer decides what to buy, which ultimately should determine what will be produced. The law of demand says that the quantity of a good that consumers will purchase is an inverse function of price (quantity demanded decreases with increasing price) in a given period of time, ceteris paribus (which means that prices of substitutes, for example, remain unchanged). (C) Red Hill Capital Corp. , Delaware, USA 2008 30

Chapter 3: market analysis n n n It is based on the behavioral fact that consumers have a marginal utility for things that is decreasing. From all of the individual demand schedules, intentions to buy, we add up all quantities at each price to get the total demand curve for something. Quantity demanded changes with changing price, that is a move along a demand curve. (C) Red Hill Capital Corp. , Delaware, USA 2008 31

Chapter 3: market analysis Demand curves can be transformed (shifted) into new demand curves by non-price factors, like prices of substitutes, change in number of buyers, income, tastes and preferences, and expectations. n The law of supply says that sellers are willing to offer more goods at a higher price, ceteris paribus. It is upward sloping n (C) Red Hill Capital Corp. , Delaware, USA 2008 32

Chapter 3: market analysis n n Changes in the supply curve come from non-price: number of sellers, technological change, input prices, taxes/subsidies, expectations, and prices of competing goods. Note: new curves, i. e. , new demand or new supply, always come from non-price factors. The curves we draw show quantify as a function of price only. (C) Red Hill Capital Corp. , Delaware, USA 2008 33

Chapter 3: market analysis n n Finally, we need to put supply and demand together to find out, through working out surpluses and shortages, an actual equilibrium price and quantity that the price system mechanism has used the forces of the market to ultimately efficiently determine. Then, society has maximized the benefits of some scarce resources. (C) Red Hill Capital Corp. , Delaware, USA 2008 34

Chapter 4: markets in action n n Now that supply and demand have met, we look at what happens when either the supply or demand curve changes. We get new equilibrium price and quantity, as shown in the next 2 slides. We can look at what happens when governments try to fix prices. We also look at how markets can fail and lead to not good outcomes. (C) Red Hill Capital Corp. , Delaware, USA 2008 35

Effects of demand shifts on equilibrium n Diagrams and causal chains Increase in demand Increase in Equilibrium price Increase in Quantity supplied Decrease in demand When Haircut demand rises P D 1 D 2 S Decrease in Equilibrium price Decrease in Quantity supplied When SUV demand falls P D 2 (C) Red Hill Capital Corp. , Delaware, USA Q 2008 D 1 S Q 36

Supply Changes n n Causal chain and graphs. Note there is a mistake in the arrow for price in the graph in the book on page 92 for decrease in supply Increase in supply P Decrease in Equilibrium price D Increase in Quantity demanded S 1 (C) Red Hill Capital Corp. , Delaware, USA 2008 Decrease in supply P S 2 Q D Increase in Equilibrium price S 2 Decrease in quantity demand S 1 Q 37

Chapter 4: markets in action n n Given those basic facts, what will happen if the government tries to fix the price of something, either above or below, floor (lowest allowed sale price) or ceiling (highest allowed price), this natural equilibrium price. A common example of a ceiling is on rents. The government might be concerned that its citizens be able to afford rent, so they put caps (ceilings) on rental prices. (C) Red Hill Capital Corp. , Delaware, USA 2008 38

Chapter 4: markets in action That will lead to a shortage, that will lead to bad behavior, like black market renting and subletting, bribes, and, ultimately, inefficiency and market failure. n Minimum wages is a common floor, leading to surplus, to market failure, to unemployment. n (C) Red Hill Capital Corp. , Delaware, USA 2008 39

Chapter 4: markets in action n n Markets can also have failures, even without the interference of the government in natural markets affairs. First, a market might lack competition. Maybe only one company ever found that a particular good was profitable, and it grew into a huge percentage of the market. What if there is market that no on cares about, supply-wise? Any sort of lack of competition is a failure. (C) Red Hill Capital Corp. , Delaware, USA 2008 40

Chapter 4: markets in action n Governments get involved in trying to solve these other failures. For lack of competition, governments might act to make the few people in the industry act as though they are in a competitive market. For example, that is done with electric and water utility companies that have to be necessarily large and cannot easily exist in great multiplicity. (C) Red Hill Capital Corp. , Delaware, USA 2008 41

Chapter 4: markets in action n It would be difficult to offer citizens of a town an option to buy water from 100 companies, because there would have to be 100 main water lines running through the whole town. Externalities are external affects by or on markets. They can be good or bad. Pollution is an example of bad. A steel producer pollutes the atmosphere. People get sick, everything, including the water, gets dirty, and there is a large cost to society. (C) Red Hill Capital Corp. , Delaware, USA 2008 42

Chapter 4: markets in action n n By taxing bad or regulating that the producer must buy and install pollution control, the cost will rise, the offer price will rise, and the market price and quantity will be a new equilibrium, with higher price and lower quantity, as the supply curve is shifted against a fixed demand curve. A positive externality is something that benefits people who do not buy the product. (C) Red Hill Capital Corp. , Delaware, USA 2008 43

Chapter 4: markets in action n Inoculation of children against bad diseases benefits the people whose children go to school with them. Since most are inoculated, the others are fairly well protected against being with someone with the disease. Those who benefit are free-riders. Free rides give the government another reason to get involved in the economy. (C) Red Hill Capital Corp. , Delaware, USA 2008 44

Chapter 4: markets in action n Public works is a function performed by a government wherein without intervention, the things would likely not get done. These are things, like interstate highways, national defense, or community parks. If you asked people to contribute to such things as they saw fit, most would probably try to get away with paying nothing and still getting the benefit of everyone else's payment. (C) Red Hill Capital Corp. , Delaware, USA 2008 45

Chapter 4: markets in action n It is another general behavior of human beings. A debatable failure is the income inequality issue. Some argue that markets are inefficient in that people’s incomes vary so widely; others would argue that is just the market making efficient use an pricing of what it has got. (C) Red Hill Capital Corp. , Delaware, USA 2008 46

Chapter 5: Elasticity n n n So, since we have talked about how supply and demand relate quantities to prices, and that both curves can change, it would be nice to know how things might change. Percentage change of one thing with unit percentage change of another variable is called elasticity. Price elasticity of demand tells how demand will change with price changes. That will be interesting information for producers. (C) Red Hill Capital Corp. , Delaware, USA 2008 47

Chapter 5: Elasticity n n n It is always a negative number (downward sloping curve), so we usually just drop the minus sign. A downward sloping demand curve will show ranges of the different types of elasticity, with elastic towards higher prices and with inelastic range towards the bottom of price. Income elasticity of demand looks at how demand varies with a person’s income. (C) Red Hill Capital Corp. , Delaware, USA 2008 48

Chapter 5: Elasticity n n n There is a division: inferior goods have negative elasticity, while normal good have a positive elasticity. Inferior goods, formerly called necessities, have e negative change versus income. As income rises, people buy better food, and buy a car instead of taking a bus. Normal goods, formerly called luxuries, have an increase when people earn more money. (C) Red Hill Capital Corp. , Delaware, USA 2008 49

Chapter 5: Elasticity n n n Price elastic of demand has to do with substitutes and budgets versus wants and needs. If something is elastic, that means that changes in price will lead to bigger changes in quantity demanded. Inelastic means that there is no choice, we have to have the good or we don’t care much about the price. (C) Red Hill Capital Corp. , Delaware, USA 2008 50

Chapter 5: Elasticity n n n Cross-elasticity of demand looks at change in quantity demanded of one good versus change in price of another good. Then, we have a division: substitutes and complements. It can be positive or negative, depending. For a substitute, the increase of the price of a competitor will give you more business, so cross elasticity for substitutes is positive. (C) Red Hill Capital Corp. , Delaware, USA 2008 51

Chapter 5: Elasticity n n n If a complement, like French fries with a hamburger, an increase in the price of one will cause the quantity demanded of the other to drop, so it is negative. Price elasticity affects the shares that supplier and consumer will pay of an excise tax slapped onto the price of a good. If demand is perfectly inelastic, the consumer will bear the whole cost. If it is perfectly elastic, the supplier will pay all of the tax. (C) Red Hill Capital Corp. , Delaware, USA 2008 52

Chapter 5: Elasticity n n In between, an upward-sloping supply curve will shift upward by the tax. Price will move up the old downward sloping demand curve to a new price. However, the change in the market equilibrium price will not be as large as the tax added, and consumer and producer will share the tax burden. That phenomenon is called tax incidence. (C) Red Hill Capital Corp. , Delaware, USA 2008 53

Elasticity and Taxation n When demand is other than perfectly elastic (vertical) it will have a downward slope. Because of the downward slope, the burden will shift from totally on the buyer to a split between buyer and seller. Thus, of T = Tax, the added cost, the part that is shifted to the buyer is the difference between what he paid before and what he is paying now, which change in price is less than the added cost = T (C) Red Hill Capital Corp. , Delaware, USA 2008 Change in market price = ΔP T – ΔP Buyer Seller Total Tax = T 54

Elasticity and Taxation n In the diagram, we also show what happens when supply is more inelastic (blue lines). Then, the part of the tax shifted to the buyer is less, the more inelastic the supply for the same tax. (C) Red Hill Capital Corp. , Delaware, USA 2008 Change in market price = ΔP T – ΔP Buyer Seller Total Tax = T 55

Mod 3: Business, Company & Industry Analysis

Chapter 6: Production costs. n n n People are in business to make profits, which depend on revenues and costs. They are self-interested. Economics adds a cost to normal accounting profits: implicit, opportunity costs, to arrive at economic profit. Opportunity costs arise again. We have the opportunity costs associated with doing a business or taking our time and money and doing something else. (C) Red Hill Capital Corp. , Delaware, USA 2008 57

Chapter 6: Production costs. n n To look at production and costs, we divide time into a long-run, over which everything can be changed in the production operation, including scope, and the short-run, over which at least one input to the production process is fixed and cannot be changed. The production function is the relationship between the maximum output that can be achieved with various quantities of inputs. (C) Red Hill Capital Corp. , Delaware, USA 2008 58

Chapter 6: Production costs. n n Then, another marginal concept, marginal product, which is the change in output with a change in unit input of labor (variable input). Marginal product curves will slope upward, peak out, and turn downward because of the law of diminishing returns. (C) Red Hill Capital Corp. , Delaware, USA 2008 59

Chapter 6: Production costs. n n n Returns diminish as more variable inputs are added to a fixed input, the extra output at each addition will be less and less. The first employ gets you in business. The second employee shares tasks with the first in such as way as to more than double output of just one. The third helps, but it gets to a point where the added efficiency is gone, and they just start to get into each other ways. It is a short-run law. (C) Red Hill Capital Corp. , Delaware, USA 2008 60

Chapter 6: Production costs. n n n Total (short-run) costs can be divided into fixed costs, which are paid no matter how many units produced, build a minimum cost into the business, and variable costs that vary with units. TC=TFC+TVC. Average costs are costs per unit. ATC=AFC+AVC. They are more interesting. Then, we can talk about marginal costs (MC) as the additional cost incurred by producing one more marginal unit of production. They are the most interesting of all, and they tell how to run the business. (C) Red Hill Capital Corp. , Delaware, USA 2008 61

Chapter 6: Production costs. n n n First marginal cost and marginal product are inversely related. The marginal-average rule says that when the marginal is below the average, the average will fall with the marginal change. When it is above, the average will become larger. The M-A rule results in MC cuts the AVC and ATC curves at their minimums. We include the picture in the next slide. (C) Red Hill Capital Corp. , Delaware, USA 2008 62

AC & MC Data n Average and marginal costs are shown for MAT ATM’s. MAT ATM's AC 1 50 100. 00 50. 00 150. 00 34 50. 00 42. 00 92. 00 24 33. 33 36. 00 69. 33 19 25. 00 31. 75 56. 75 5 23 20. 00 30. 00 50. 00 6 30 16. 67 30. 00 46. 67 7 38 14. 29 31. 14 45. 43 8 48 12. 50 33. 25 45. 75 9 59 11. 11 36. 11 47. 22 10 75 10. 00 40. 00 50. 00 11 95 9. 09 45. 00 54. 09 12 AFC AVC 4 AVC AFC 3 ATC MC 2 MC Q 117 8. 33 51. 00 59. 33 (C) Red Hill Capital Corp. , Delaware, USA 2008 63

Chapter 6: Production costs n n n In the long-run, the LR ATC curve is built up of all of the possible SR ATC curves. (See next slide). The general form will be U-shaped. The U-shaped curve has 3 distinct regions. The downward sloping part is economies of scale, which comes from a increasing efficiency of larger scale of production. The flat middle region is constant returns to scale. The upward sloping region is diseconomies of scale where bigger becomes not better but more cumbersome to manage. (see second next slide). (C) Red Hill Capital Corp. , Delaware, USA 2008 64

Long run average cost curves n We might imagine a more comprehensive case of more possibilities in the long run, as shown in the graph below. (C) Red Hill Capital Corp. , Delaware, USA 2008 65

Long run Possibilities n In the long run there can be economies of scale, constant returns to scale, and even diseconomies of scale as size becomes too bulky and unmanageable. Cost Economies of scale Diseconomies of scale Constant returns to scale (C) Red Hill Capital Corp. , Delaware, USA 2008 Output 66

Chapter 7: Perfect competition n We want competitive markets because we can have confidence in price and quality. We don’t want producers to take advantage of us and make excessive profits. Perfect competition is an ideal, not reality, but we can learn from looking at this idealism. There a number of market structures that depend on how many suppliers, uniformity of product, and ease of entry/exit. (C) Red Hill Capital Corp. , Delaware, USA 2008 67

Chapter 7: Perfect competition n Markets can vary from one supplier, a monopolist, who decides what profit he will make. In an oligopolistic market, there are few suppliers, and they could collude to set the price. In monopolistic competition, people, like restaurants and exclusive boutiques try to distinguish themselves from their competitors so as to be like a mini-monopoly. (C) Red Hill Capital Corp. , Delaware, USA 2008 68

Chapter 7: Perfect competition n n Finally, perfect competition is characterized by many indistinguishable firms with indistinguishable products and ease of entry/exit. As a result, firms are price takers because they have no control over the price set by the interaction of total demand with total supply. Each, effectively, faces a horizontal demand curve, completely elastic, because people can just go next door and buy the same exact product. (See next slide for summary) (C) Red Hill Capital Corp. , Delaware, USA 2008 69

Comparative Market Structures Structure # of sellers Product Entry Examples Perfect Competition Large Homogeneous Very easy Small crops, commodities markets Monopolistic competition Large Differentiable Easy Restaurants, motels, clothing or other types of boutiques Oligopoly Few Usually differentiable; can be homo Difficult Airlines, Automobile manufacturing, oil production Monopoly One Unique Extremely difficult Public utilities (C) Red Hill Capital Corp. , Delaware, USA 2008 70

Chapter 7: Perfect competition n n The perfect competitive firm will have max profits when MR (marginal revenue) equals MC. We saw that MC cut the ATC at its minimum, so that is the minimum of unit cost. Marginal revenue is equal to the extra revenue from one more unit of output MR = ΔTR/ΔQ. In a perfectly competitive industry, the MR will always equal market price per unit, and the TR will be on a straight line with constant slope = MR. (C) Red Hill Capital Corp. , Delaware, USA 2008 71

Marginal Revenue = Marginal cost n n n Max profits will occur at MC = MR, Profit = TR – TC. ΔProfit/ΔQ = ΔTR/ΔQ – ΔTC/ΔQ = MR – MC. That equation tells us that profit will increase (ΔProfit/ΔQ > 0) if MR > MC. Profit will stop increasing (ΔProfit/ΔQ = 0) when MR=MC And profit will begin to decrease (ΔProfit/ΔQ < 0) after that point when MC > MR. Then, we have the MR=MC Rule which says that maximum profits or minimum loss will occur at the point where MR=MC. (C) Red Hill Capital Corp. , Delaware, USA 2008 72

Competition and Policy n n n In chapter 4, we saw that lack of competition can lead to market failures that result in inefficient outcomes. On the other hand, perfectly competitive markets will lead to maximum efficiency. In that regard, governments around the world have devoted much regulation and legislation to promote efficiency by encouraging competition and to discourage anticompetitive behavior through legal and financial penalties. (C) Red Hill Capital Corp. , Delaware, USA 2008 73

Chapter 7: Perfect competition n The SR supply curve of a firm will ultimately be its marginal cost curve, and the industry supply will be the sum of them. A firm will be able to stay in business when revenues are at least equal to costs, or zero economic profit or above. If profits are above ZEP, other firms will enter; if they fall below, firms will leave, and prices will be bid up to normal (ZEP). (C) Red Hill Capital Corp. , Delaware, USA 2008 74

Chapter 7: Perfect competition In the long run all suppliers will have either exited or moved to the minimum on the LR ATC curve, and there will be an intersection of all curves. (See slide below. ) n The LR supply curve will depend on the type of industry, decreasing cost as industry grows, flat costs or increasing costs: down, horizontal, upward sloping. n (C) Red Hill Capital Corp. , Delaware, USA 2008 75

A Typical Firm in Long-run Equilibrium n n P = MR = SRMC = SRATC = LRAC. In LR equilibrium, firms will operate at the minimum of LRAC. Causal Chain SRMC Entry/Exit Of Firms SRATC LRAC MR Zero LR Economic Profits Long-Run Equilibrium (C) Red Hill Capital Corp. , Delaware, USA 2008 76

Mod 4: The macro economy

Chapter 11: Measuring the economy n n National income accounting measures aggregate numbers of economies. One popular measure of aggregate economic activity is GDP, which is all the new production made inside a country for final users. There are many other accounts. It uses the concept of value added so as not to count intermediate goods that go into some other final good, like CPU’s that are put into computers. (C) Red Hill Capital Corp. , Delaware, USA 2008 78

4 -Sector Model Product Markets G& S y l pp Su ry to n ve in ent d & stm xe nve Fi i tion ump s Con pend ex m De Surplus Net taxe s Deficit HH gs avin S st Factor Markets ym en ts d an em D y nve pp l Pa to i Su s: or ct Fa (C) Red Hill Capital Corp. , Delaware, USA 2008 d row or Government Financial markets Bor ct $ paid imports an Businesses Fa Foreign Economies m $ $ nd a De $ paid exports 79

Chapter 11: Measuring the economy n n n One common way to measure GDP is the expenditure approach. It adds up C, I, and G spending on all products, then, adds X to other countries and subtracts out M because some of the spending was on imports. GDP = C+I+G+(X – M). Shortcomings of GDP it misses non-market and illegal transactions, quality, distribution, neglect of leisure time, and economic bads. GDP must be adjusted for price changes, GDPdeflator, to get output, real GDP: nominal GDP = Price index x real GDP. (C) Red Hill Capital Corp. , Delaware, USA 2008 80

Chapter 12: Cycles and growth. n n There is the long-term trend of growth of an economy and the shorter-term cycle around the trend: the business cycle. The 4 phases of the cycle are peak, recession, trough, expansion. We look at indicators of activity: leading, lagging and coincident, to find out where we are in a cycle. Changes in total spending, AD, determine business cycles. Also supply shocks can do it. (C) Red Hill Capital Corp. , Delaware, USA 2008 81

Chapter 12: Cycles and growth. n n Then the GDP gap is the difference between actual and full-employment real GDP. The aggregate production function is the output per worker versus quantity of production factors per worker. Factor accumulation and technological change determine LT growth. Savings is used to pay for investment. There is a perfect savings rate that leads to the perfect amount of capital, called the golden rule. (C) Red Hill Capital Corp. , Delaware, USA 2008 82

Golden rule in a nut shell n n n The PPF (capacity to produce) can expand only through producing more capital goods. S is used to buy I; S comes out of DI and means less C. Capital goods wear out and need to be replaced, so some capital spending is for replacement. (C) Red Hill Capital Corp. , Delaware, USA 2008 83

Golden rule in a nut shell n n n There will be a maximal capital/person to make a maximal productive capacity. We need enough S to get to the level of capital accumulation per worker and maintain it through all the wearing out. That maximal amount of capital that needs replacement each year as it wears out is the golden rule amount of capital leading to the golden rule savings rate. (C) Red Hill Capital Corp. , Delaware, USA 2008 84

Chapter 12: Cycles and growth. n n n The Solow model of growth says we need more factors of production person to grow. It assumes that technological change comes from outside the system. The exogenous growth model adds technology growth as a result of development of a knowledge base within the framework of the economy. (C) Red Hill Capital Corp. , Delaware, USA 2008 85

Chapter 12: Cycles and growth. n n Suggestions for macroeconomic policy include trying to dampen cycles. The reason is that unemployment increases in downturns, and inflation tends to increase in upturns. Pursue policies that allow an economy to achieve its highest potential LT growth. That will also entail microeconomic policy measures. (C) Red Hill Capital Corp. , Delaware, USA 2008 86

Chapter 13: Inflation & unemployment n n n So, lets look more closely at inflation and unemployment, two big concerns of people and their governments. There a number of inflation measures, like CPI. Since aggregate inflation measures use an average consumer basket of G&S they will be imperfect for all cases. There is no accounting for quality. Unchanged weightings ignore demand changes with price changes of substitutes. (C) Red Hill Capital Corp. , Delaware, USA 2008 87

Chapter 13: Inflation & unemployment n n Inflation shrinks purchasing power of income but it can increase wealth in investment assets, like real estate, stocks, and art, which tend to increase at paces faster than inflation, so those without much wealth suffer the most. Interest rates are, in fact, composed of a real rate plus inflation (plus other factors that depend on risk, and length of maturity of the investment). The largest factor in investment, I, is interest rate, and the inflation part, when it is high and volatile discourages business and HH investment. Inflation can be demand pull or cost push. (C) Red Hill Capital Corp. , Delaware, USA 2008 88

Cost-push & Demand-pull Inflation q. The important thing to talk about when talking about graphs like these is that a curve moves and there is a new intersection, equilibrium. Cost-push Demand Pull (C) Red Hill Capital Corp. , Delaware, USA 2008 89

Chapter 13: Inflation & unemployment n n n Unemployment is not a simple definition, either. There are seasonal variations, like farm workers or people who work at winter resorts. Frictional unemployment has to do with imperfect information leading to temporary job-personnel mismatching. People either must or want to change their jobs. (C) Red Hill Capital Corp. , Delaware, USA 2008 90

Chapter 13: Inflation & unemployment n n Structural unemployment has to do with evolution of the economic system and society: things change, and there is no longer need for certain jobs, like horsecarriage drivers. We need newer things like a person who can do maintenance on robots. Cyclical unemployment is the variation over recession and expansions. When the economy is good, more businesses hire; when it is bad, they fire. (C) Red Hill Capital Corp. , Delaware, USA 2008 91

Chapter 13: Inflation & unemployment n n n Then, full employment is defined, practically, as employment with seasonal, frictional and structural but without cyclical unemployment, as the putative zero unemployment rate. Full employment is also known as the natural rate of unemployment or non-accelerating inflation rate of unemployment (NAIRU), and it will change over time. Things that can change the full employment unemployment rate are changing composition of the workforce, the interaction of tax and welfare systems, and hysteresis. (C) Red Hill Capital Corp. , Delaware, USA 2008 92

Chapter 13: Inflation & unemployment n n n Hysteresis just means that the full employment unemployment rate changes with changes in employment. When the economy comes out of recession, for example, the insiders bid up wages to the point that the company cannot afford as many new people as it could at the end of the last peak. On the other hand, when people sit around unemployed their skills dull, and it might be hard to get a job when things pick up. (C) Red Hill Capital Corp. , Delaware, USA 2008 93

Mod 5: Macroeconomic Analysis

Chapter 14: simple macro model n n n Classical macroeconomic thinking was dominated by Say’s Law, which said that supply creates its own demand: production creates just enough income to purchase it all. It is based on the assumption that all prices, including wages, are flexible, so that if it didn’t work out, prices would drop, the aggregate market would clear, and everyone would remain employed. Keynes put emphasis on the demand side and said that aggregate expenditures = C+I+G+(X – M) might not be enough for full employment. (C) Red Hill Capital Corp. , Delaware, USA 2008 95

Chapter 14: simple macro model n n n C and I are the major parts. C is more stable because people tend to maintain their lifestyles. C depends on DI, personal income after tax, which is split into C+S. C and S are determined by MPC and MPS. Non-income factors that affect C are expectations, wealth, the price level and interest rates. (C) Red Hill Capital Corp. , Delaware, USA 2008 96

Chapter 14: simple macro model n n n The 2 main factors affecting I are expectations of future returns and interest rates. Other factors include technological change, capacity utilization, and taxes. G are autonomous expenditures, not varying in a systematic way, depending on political decisions. G is a crucial in the Keynes policy prescription, in that the government can use its expenditures to kick start the economy and ride on the multiplier effect for its expenditures. (C) Red Hill Capital Corp. , Delaware, USA 2008 97

Chapter 14: simple macro model n n n X an M are affected by external economic conditions and internal, respectively, and both are also affected by exchange rates and terms of trade. At any given time, firms will be offering a quantity of their products, based on their expectations of demand, at certain prices that they feel will be accepted and that will earn them a reasonable profit. This is AS. The willingness to purchase G&S is AD. (C) Red Hill Capital Corp. , Delaware, USA 2008 98

Chapter 14: simple macro model n n If AD is not big enough to take AS, then, firms will experience unintended inventory accumulation, and AS will be adjusted for the next period. Keynes believed that, at least when an economy is operating below full employment, that changes in the equilibrium will be change in employment, not a drop in prices and remaining unemployment. (C) Red Hill Capital Corp. , Delaware, USA 2008 99

Chapter 14: simple macro model n n n Keynes believed that prices are sticky, especially labor. It is easier to lay off workers than to ask them all to take a pay cut. The Keynes cure for that state is for government to increase spending to start the economy out of recession. The spending increase in G is enhanced by a multiplier effect: the initial earnings get respent, and re-spent… and add to demand, so a little government spending can go a long way to increasing overall AD. (C) Red Hill Capital Corp. , Delaware, USA 2008 100

The Keynes Cross n The AD line crosses the 45 o-angle line, Y = RGDP = Output: AD=output. The multiplier effect makes output increase by more than the initial addition to spending. AD Aggregate Demand n AD ΔAD 45 o ∆Output (C) Red Hill Capital Corp. , Delaware, USA 2008 Real GDP 101

Chapter 14: simple macro model n n n The downward sloping of AD, real GDP versus price level, is for different reasons than a market’s demand curve. The real balances (wealth) effect, interest rate effect and net exports effect affect C, I and X – M, respectively, and cause AD to slope down. Non-price level determinants of any of the components will shift AD. (C) Red Hill Capital Corp. , Delaware, USA 2008 102

Chapter 14: simple macro model n n AS can shift from resource costs, technology, tax/subsidies, and regulations, which change production costs. In the mid-range, cost push inflation is shift left of AS, while demand pull inflation comes from right shift of AD. We can then look at interactions of changes in AD and AS. The business cycle is shifts of AD and AS over time. AS meets AD in the next slide. (C) Red Hill Capital Corp. , Delaware, USA 2008 103

Changes in AD-AS Equilibrium Full employment (C) Red Hill Capital Corp. , Delaware, USA 2008 104

Chapter 15: monetary of financial system n n Money has changed from things like beaver pelts, seashells and precious metals (commodity money) to paper fiat money over the last several thousand years. To be money, a thing must have the following features: store of value, medium of exchange, and unit of account. It must have liquidity and be accepted by everyone for any transaction Other desirable features are scarcity, portability, and divisibility. (C) Red Hill Capital Corp. , Delaware, USA 2008 105

Chapter 15: monetary of financial system n n n Demand for money is formed from: transactions, precautionary and speculative motives. Demand is inversely related to interest rates. When interest rates go up, people will want less money: those who have extra will invest it in bonds, for example, and some who need to borrow will not because rates are too high. And conversely. (C) Red Hill Capital Corp. , Delaware, USA 2008 106

Chapter 15: monetary of financial system n n Money supply definitions are numerous and have some variation depending on where you get the definitions. The RBA makes money, and banks and the RBA, together, create more. The money base is currency in circulation plus bank deposits at the RBA. M 1 is currency in the hands of the nonbank public plus checking account deposits at banks. (C) Red Hill Capital Corp. , Delaware, USA 2008 107

Chapter 15: monetary of financial system n n n M 3 adds all other bank deposits of the non -bank public plus M 1. Broad money is M 3 plus the public’s deposits at NBFI’s less currency and bank deposits of NBFI’s. The equilibrium interest rate is where MD meets MS, and MS is fairly well fixed, but can be changed by the RBA and banks. (C) Red Hill Capital Corp. , Delaware, USA 2008 108

MS meets MD & causal chains Excess Money Demand People Sell Bonds Excess Money Supply People buy bonds Surplus MD Bond price Falls Rates rise Bond prices Up Rates fall MS Shortage (C) Red Hill Capital Corp. , Delaware, USA 2008 109

Chapter 15: monetary of financial system n n Thus, the government can affect supply, which affects interest rates. Interest rates affect the quantity of money demanded. I is affected. Thus, AD is already affected. When new equilibrium comes between changed AD and stationary AS, prices and/or employment might be affected. We show causal chains and graphs in the next few slides. (C) Red Hill Capital Corp. , Delaware, USA 2008 110

The Causal Chain Change in Money Policy Change in Price, GDP, Employment Change in Money Supply Change in Aggregate Demand (C) Red Hill Capital Corp. , Delaware, USA 2008 Change in Interest Rates Change in Investment 111

Graphical Chains MS Investment vs. Rates Real GDP vs. Price level (C) Red Hill Capital Corp. , Delaware, USA 2008 112

The Australian financial system. n n At the base is the RBA, which is in charge of system stability, monetary policy, and the payments system (ESA’s). It also acts as banker for the government. Banks are plugged into the RBA. They have capital and liquidity requirements, but they can create money through fractional reserve banking, which was invented by goldsmiths, along with the first paper money several hundred years ago in Italy. (C) Red Hill Capital Corp. , Delaware, USA 2008 113

The Australian financial system. n n n They are used by the RBA to change MS through open-market operations. They are also financial intermediaries for other intermediaries: NBFI’s. There also a few other types of financial companies, like money market funds and registered financial corporations. Those are financial institutions. (C) Red Hill Capital Corp. , Delaware, USA 2008 114

The Australian financial system. n n Then, there are financial markets where ST MM instruments are traded, interbank or wholesale, stocks (corporate equity certificates), bills (short-term debt certificates), and bonds (LT debt certificates) are brought to initial market and traded (secondary market). The foreign exchange markets deal with the supply and demand for AUD versus other countries’ currencies. (C) Red Hill Capital Corp. , Delaware, USA 2008 115

The Australian financial system. n n Financial and foreign exchange markets are all about allocating savings to investment and laying off risk. Financial futures allow for further risk reduction. The final layer of risk reduction and speculation mechanisms in the system are options, which are the right but not the obligation to buy or sell something at a given price by a specific future date. They allow protection with the ability to profit if things go the other way. (C) Red Hill Capital Corp. , Delaware, USA 2008 116

Mod 6: Macroeconomic Policy

Chapter 16: monetary policy Monetary policy, managing the money supply, will try to have a stable currency which comes with low inflation, stable economic growth, and low unemployment. n In Australia, the RBA has a stated goal of keeping inflation in the 23% range, expecting the rest to follow. n (C) Red Hill Capital Corp. , Delaware, USA 2008 118

Chapter 16: monetary policy It achieves that goal by setting targets for the overnight, inter-bank cash rate that it wants the markets to obey, or it will assist through open market operations to change MS to get its target. n It has been found, through international experiment, that it is easier to set or target rates than to manage MS. n (C) Red Hill Capital Corp. , Delaware, USA 2008 119

Open market operations RBA sells Securities; banks Buy; bank deposits at RBA decline RBA buys Securities; banks Sell; deposits at RBA increase Banks have less money They decrease loans Raise interest rates Banks have more money They increase loans Interest rates decline Public (C) Red Hill Capital Corp. , Delaware, USA 2008 120

Chapter 16: monetary policy The Keynes view of policy is an active role. n The assumption of monetarists is that money velocity is predictable when it has been changing, in reality, due to financial deregulation and innovation over the past 30 years. n Money velocity is how many times the same dollar bill gets used in transactions in a year. n (C) Red Hill Capital Corp. , Delaware, USA 2008 121

Chapter 16: monetary policy n n Monetarists argue that it is better to stick with target growth of the money supply and not get involved with micromanagement because time lags might lead to the wrong thing at the wrong time, timing-wise. The differences between what Keynesians and monetarists believe about policy transmission is shown in the next slide. (C) Red Hill Capital Corp. , Delaware, USA 2008 122

The Causal Chain: monetarist vs. Keynes Monetarist Chain Short circuit Change in Money Policy Change in Price, GDP, Employment Extended, Keynes Route Change in Money Supply Change in Aggregate Demand (C) Red Hill Capital Corp. , Delaware, USA 2008 Change in Interest Rates Change in Investment 123

AD-AD response example n n Suppose that the RBA tightens credit. Then, AD will shift left, as shown, below. Real GDP vs. Price level AD 1 AD 2 (C) Red Hill Capital Corp. , Delaware, USA 2008 124

RBA in FX n n n Because the AUD is free floating, the RBA no longer has need to be too involved in the FX markets. It will however engage in smoothing operations, when the markets are excessively volatile or testing, if it thinks that there is too much speculative pressure on the AUD. Operations in the FX markets can also have an affect on MS. (C) Red Hill Capital Corp. , Delaware, USA 2008 125

Chapter 17: Fiscal policy n n n Governments are needed by society, at least for the creation of public goods and services (public works). So, to pay for those expenditures, it needs revenues. That is basically the beginning of fiscal policy. Then, there is discretionary fiscal policy is supposed to be used to influence the economy. Governments can use taxes, subsidies, or spending to affect economic activity. (C) Red Hill Capital Corp. , Delaware, USA 2008 126

Chapter 17: Fiscal policy n n n If a government uses G to affect the economy, there will be a multiplier effect of, theoretically, AD = G/MPS. If it uses taxes, the affect will be AD = MPC DI/MPS. To get the whole multiplier amount in actual change in equilibrium AS meets AD, we must be in the flat range of AS. If we are in neo-classical, it will be part increased RGDP and prices; if in the classical, increased AD will just get increased prices. (C) Red Hill Capital Corp. , Delaware, USA 2008 127

Chapter 17: Fiscal policy n n Since governments often spend more than they take in in revenues, they can run budget deficits, which has brought many people around the world to make governments act more fiscally responsible and balance their budget. Still, even a balanced budget can affect the economy, but when we combine changes from taxes and spending, from above, we get a balanced budget multiplier of 1. (C) Red Hill Capital Corp. , Delaware, USA 2008 128

Chapter 17: Fiscal policy n n n Since taxes and spending, like unemployment and welfare benefits will automatically experience some changes in the business cycle, some counteractive fiscal policy to moderate the business cycle is built in. Beyond that, some governments build in more, in automatic stabilizer policy to specifically to counteract some of the affects of ups and downs of the cycle. An alternative approach to the demand-side policy from above, there is supply-side theory. (C) Red Hill Capital Corp. , Delaware, USA 2008 129

Chapter 17: Fiscal policy n n n Supply-siders do things to foster growth of supply by cutting regulations, contributing to R&D for technological development, helping to reducing costs of resources, decreasing taxes on income and investment, and other subsidies. Then, more quantity will be supplied at every price, AS moves right, and the intersection with demand will be at higher real GDP and lower prices. Other things governments can do are use GST to tax consumption rather than income, which encourages workers and savers. (C) Red Hill Capital Corp. , Delaware, USA 2008 130

Chapter 17: Fiscal policy It can create job networks to fight unemployment. n Domestic debt held by domestics is just money out of one pocket into another. n Government spending should focus on accumulating public capital, that way the debt is balanced against assets of the people. n (C) Red Hill Capital Corp. , Delaware, USA 2008 131

Lecture End of lecture part. n Read the summary at home; it will help. n The description of the final exam is at the back of the slides along with review scheduling. n (C) Red Hill Capital Corp. , Delaware, USA 2008 132

In sum

Summary n n Economics is based on psychology, logic and a little math. Scare resources must be allocated. There are financial and opportunity costs. The PPF shows the possibilities for allocation to the supply side. People want, so producers produce to satisfy them and make a profit to satisfy themselves. Consumers have sovereignty, and they have decreasing marginal utility for things. (C) Red Hill Capital Corp. , Delaware, USA 2008 134

Summary n n We look at psychology for the underlying behavioral motivations of people in economic circumstances as buyers or sellers. We use logic to set up causal chains, so that we can imagine the chain of events that relate one thing that happens in an economy to ultimate logical outcomes. Thus, we develop logical relationships among variables. (C) Red Hill Capital Corp. , Delaware, USA 2008 135

Summary n n We use math to characterize those logical relationships as best we can. Indeed, we rely mostly on graphical analysis as the mathematical framework. Actual equations are so complicated as too be next to impossible, in many cases, anyway. For example, imagine trying to find the demand schedule for hotdogs in New York City. We would have to survey several million people or some representative sample of people, ask them how many hotdogs they would buy at various prices, and in the end, would we really know the demand? (C) Red Hill Capital Corp. , Delaware, USA 2008 136

Summary n n We looked at supply and demand in markets as means of allocating the resources in. Elasticity measures how demand supply change with various variables, which is a good thing to know for producers. Diminishing returns leads to marginal product that peaks, leads to MC curves that cut ATC at the minimum and become supply curves. Then, MC=MR is where supply meets demand. (C) Red Hill Capital Corp. , Delaware, USA 2008 137

Summary n n We apply these concepts to the aggregate economy, using different psychology, and analyzed AD, AS, MD, and MS. An we also look at the ancillary affects: inflation and unemployment, which are important variables to society. We looked at how markets can fail and how governments try to get involved in them. They can use tax, subsidy, public goods, and regulation to do things and to change things in individual or more general markets. (C) Red Hill Capital Corp. , Delaware, USA 2008 138

Summary n n n We finished by looking at how else the government becomes involved in the more general economy. It makes and controls the money, which is used as the means to effect transactions in an economy, so it has monetary policy that can affect money supply, interest rates, and the general economy. Fiscal policy can be used to have government expenditures and taxes that promote effective use of economic resources to make good growth with low inflation and unemployment, and accumulate public capital. (C) Red Hill Capital Corp. , Delaware, USA 2008 139

(C) Red Hill Capital Corp. , Delaware, USA 2008 140

Marginal summary Marginal utility Marginal cost = marginal benefit Decreasing Market marginal exactly utility clears Law of Demand Marginals Marginal product cost (MC) revenue (MR) propensity (MP) to consume/s ave Decreasing Inversely Demand % extra marginal related to curve for DI spent product MP perfect and saved competition Equilibrium Law of Above MC = MR for of S&D Diminishing AVC it is max profits returns the supply curve (C) Red Hill Capital Corp. , Delaware, USA 2008 Used in multiplier for G and tax cuts 141

Examination The final examination will consist of one, two hour paper requiring answers that draw from the study material, text and assessments. It will contain three sections; multiple choice questions, short answer questions and extended response type questions, with the following breakdown of marks. Structure of the final examination n Question type Number of questions Weighting Compulsory multiple choice 20 25% Compulsory short answers 3 15% Extended response questions 2 (of a possible 4) 30% (C) Red Hill Capital Corp. , Delaware, USA 2008 142

Examination Please note: the format of the examination will be similar to that of past years. However, compared to previous examinations, there will be fewer questions and the time allowed has been reduced to two hours. n Sample questions will be provided on the course home page on USQStudy. Desk. Past examination n Copies of past examination papers and suggested answers can be found on the course home page via USQConnect study desk. n (C) Red Hill Capital Corp. , Delaware, USA 2008 143

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