Consumption Bundle Assumptions

Introductory Macroeconomics

Following up from our introduction to economics/macroeconomics article, this post talks about ‘self-interest’ and maximizing over a set of preferences subject to constraints.

Let’s start off with some examples, but first, the tools we’ll need (some images used because it’s a bit tough to get the right characters).

Consumption Bundle (CB):
consumption bundle

Preference Ordering: Will use statements to rank bundles from least to most. It is possible to construct if: 1. You are always able to make such a statement, 2. Statements are consistent.

Let’s explore some of these ordering assumptions.

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RRSP Tax Benefits and Hints – Get Ready to Buy

RRSP Tips and Benefits

Now is the time to buy buy buy into some respectable mutual funds (or perhaps stocks if you have guts). The market is all time lows, which means folks who have money can invest into quality companies at 1/2 to 1/3 of the price. Here are some tips as the end of the tax season fast approaches.

– Consider the preferred tax treatment for dividends and capital gains on investments held outside your RRSP when determining which types of assets to hold inside your RRSP. Be sure to take into account the new lower tax rates on eligible dividends.

– Consider a spousal RRSP for retirement income splitting if you expect your spouse’s retirement income to be lower than yours. Keep in mind that your retirement income from your matured RRSP may qualify for new spousal income splitting rules. Especially relevant if you’ve run out of contribution room.

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The Impact on the Economy: Oil Prices Dip Below $50 a Barrel

JessicaFender / Pixabay

It seems like a bygone era when fuel prices were this low. Oil dipped below $50/barrel for the first time in 10 years. Prices at the pump are the lowest in a decade which makes commuters and truckers thrilled, but what about the economy as a whole, and what can we expect in the New Year with depressed oil prices?

Well first things first, there is no conspiracy theory, if we follow Occam’s Razor, and in this case we should, then we should conclude that the cause of the recent decline is simply supply and demand economics. The world demand for oil is low, major economies like India and China are slowing, and as such the current supply is starting to accumulate. It doesn’t help matters that oil producing nations are not slowing production. OPEC is happy to continue pumping; Saudi Arabia has no interest in shutting off the pumps no matter how low oil goes.

So there are supply factors with major producers, but ultimately the reason why global prices for oil have declined, and declined so swiftly, is an issue of demand. No, it’s not to punish Russia, no it’s not to slow increases in US shale production.

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Merry Christmas From DiscussEconomics

From everyone here at DiscussEconomics we want to wish you a great Christmas. Hopefully your bills won’t get the better of you this season, but hey, if people didn’t spend we’d have nothing to talk about! If you don’t do the Xmas thing then hey, Happy Holidays nonetheless. Keep yourself tuned for the latest news re: the economy and personal finances, in the new year. Winter is slow but we’ll be on top of it.

Exciting changes and additions are planned for next season including an new design so don’t forget to come back soon for a visit and to bookmark us in your browsers and news feeds.

Introduction to Microeconomics Cost Formulas

Let’s carry on from our introduction into microeconomics with a focus now on how firm’s costs vary with output in the short run (6months to 2 years).

Let’s Make an Important Assumption: Prices of inputs are assumed given (ie., firms can’t influence them)

Analyzing Short Run Cost Structure

Family of total costs concepts.

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Microeconmics: The Monopoly

Let’s start our introduction to monopolies by offering a definition: An industry comprising of only one firm. Examples include utility companies (gas, electric, water), rail, and cable companies.

Reasons for monopoly:

(1) No close substitutes
– If substitutes for a good exist, the firm would face competition from the producer of the substitute.

(2) Barriers to entry
– If a single firm is to remain the sole producer, particularly in the long run, there must be some berrier preventing other firms to enter into this industry.

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Microeconomics Cost Formulas

Here is a list of some of basic microeconomics formulas pertaining to revenues and costs of a firm. Remember when you’re using these formulas there are a variety of assumptions, namely, that the the firm is profit-maximizing (making as much money as they can.)

Here are total cost formulas, average variable, marginal cost, and more, (work out your own algebra to find alternatives):

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Dilution and Earnings Per Share: Financial Terms and Explanations

Continuing a discussion on the introductory article on financial terms and explanations, this article discussion common share dilution. Firstly, some background for EPS, let’s use a firm’s Net Income (NI), in this case on a per-share basis. The formula to derive this figure would be: Earnings per share (EPS) = NI / # of common shares. This changes when you consider distribution of Net Income, then the formula is: Net Income = Dividend paid to shareholders + Addition to Retained Earnings. When you consider the stock market: market price / earnings per share = P/E ratio.

Losing Shareholder Value in Share Dilution

EPS = NI / # common shares; EPS diluted < EPS basic; share dilution (loss in existing shareholders' value).

Let’s use an example to show how EPS dilution occurs. A fictitious company called General Ford wants to build a new facility to meet future demand of–vacuums. There is 1 million common shares and no debt currently (haha, you CAN tell it’s fiction). The current market share price = $5 –> market value =$5MM. Book value = $10MM –> $10 per share.

General Ford has experienced difficulties, including cost overruns, regulatory delays, and below normal profits. Market-to-Book ratio = 5/10 = 0.5. (Successful firms rarely have market prices less than book values.)

More info:

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Corner Solution – Perfect Substitutes: Demand Theory

Continuing on with demand theory. Previously we discussed the Cobb Douglas function, now we move into perfect substitutes and the corner solution. Here are some factors to keep in mind.

1. Indifference curves must interest one of the axis (not necessity or essential good)
2. Budget constraint line is such that the slope is greater than the MRS (marginal rate of substitution) (MRS x1, x2) good 2 for good 1 at the intercept (M/p2).

For example: Perfect substitutes: the solution –> spend your entire budget on the cheaper of any two goods to maximize utility. This is mathematically express like:

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Personal Budget Basics for Beginners

DON’T say the B-word. What caused this stigma I have no idea, but one thing is for certain, people who don’t know how to handle their money in the most basic ways know one thing for sure, don’t tell me to ‘budget’.

The fact of the matter is this, the basics of budgeting, simply taking all of your income in and calculating expenses going out to arrive at your (hopefully) positive balance, remain an integral component of basic money management. Whether you’re a youth, or just ready to take control of your own money, understanding where you money goes is crucial.

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