lowers IN CANADA penalties on sellers = larger than buyers to increase price WHY NOT DECREASE DEMAND/SUPPLY TILL QUANTITY = ZERO o B/c hgh cost of law enforcement + insufficient resources for the police to achieve effective enforcement ° ° LEGALIZING & TAXING DRUGS Imposing high tax can let government collect a large tax revenue ° ° Illegal Trading to Evade the Tax Many drug dealers & consumers would try to cover up activities to evade tax if drugs are legalized ° ° Taxes versus Prohibition: Some Pros & Cons Tax revenue can be used to make law enforcement more effective & educative campaign against illegal drug use Prohibition sends signal that influences preferences, decreasing demand for illegal drugs o Some people dislike idea of government profiting trade in harmful substances ° ° ° ° ° ° ° ° °
Chapter 9 (Possibilities, Preferences + Choices) Justin Ng ° CONSUMPTION POSSIBILITIES
° Budget Line : A household’s given amount of income to spend (cannot influence the prices of the goods & services it buys) Limits its consumption choices ° ° DIVISIBLE & INDIVISIBLE GOODS Divisible goods = can be bought in @ any quantity (i.e. electricity + gasoline) Goods being divisible = not only points on graph with whole numbers but also any point along the line ° ° AFFORDABLE & UNAFFORDABLE QUANTITIES Can afford any point on/inside line (similar to PPF) Cannot afford any point outside line Constraint on consumption depends on price & income o Constraint changes when price of a good or income changes ° ° BUDGET EQUATION Describes budget line EXPENDITURE (Price of each good x quantity bought) = INCOME REFER TO PAGE 205 ° REAL INCOME Income expressed as a quantity of goods that the household can afford to buy o Y(income) / P (price of good) o If income = $40, price of pop = $4… Real income in terms of pop = 10 cases ° ° RELATIVE PRICE Price of one good divided by price of another good Magnitude of the slope of the budget line
= opportunity cost Opposite of how to calculate the opportunity cost of products when talking about money ° ° A CHANCE IN PRICES When prices changes budget line changes The lower the price of the good (x), the flatter is the budget line (rotate outwards) = decreased opportunity cost (moving from left-right with respect to x) = relative price falls (opportunity cost falls) The higher price of a good (of x axis), the steeper is the budget line (rotate inwards) = increased OC ° ° A CHANGE IN INCOME Budget line shifts but slope does not change Increase in income = shifts rightward Decrease in income = shift leftward Opportunity Cost does not change! ° ° PREFERENCES AND INDIFFERENCE CURVES ° ° A household’s preferences determine the utility received from consuming a good or service ° Utility: The benefit or satisfaction from consuming a good or service.