Relation between Inflation and Interest Rates (graph)

A number of people and students wonder about the relationship between inflation rate movements and the quarterly interest rate (nominal and real interest rate). Here are observations based on Canadian data over a 50 years period that tracks T-Bill interest rate, consumer price index, and real interest rate.

Microeconomics Profit Maximization: Shutdown Point

Determining the Shutdown Point of a Firm This continues a previous post on profit maximization. The question we want to continue with is when should a firm shutdown? Then answer is when P (price) = AVC (average variable cost). This is the output where firms are indifferent between producing the profit-maximizing quantity (ie. loss-minimizing quantity) … Continue reading Microeconomics Profit Maximization: Shutdown Point

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, … Continue reading Microeconomics Cost Formulas

Trade Offs and Indifference Curves

Before we talk about choices, preferences, trade-offs and indifference curves, we should briefly look over some key terms. We assume people are rational decisions makers and that there is almost nothing someone is unwilling to trade for correct compensation. Non-Satiation Assumption: If some is good, more is better. Consumers always prefer more of any good … Continue reading Trade Offs and Indifference Curves

Where Do Banks Get Their Money? Fractional Reserve Banking

Do Banks Create New Money out of Thin Air? **Re-posted after the events of the credit crunch and 700 bailout packages, enjoy the read and learn how the banks got themselves in this mess.** Here’s the story. Banks keep on lending money, but where do they get it from? Do they borrow from bigger banks … Continue reading Where Do Banks Get Their Money? Fractional Reserve Banking

Shapes of Indifference Curves

The shapes of indifference curves are smooth with unique tangent at any bundle we have well define marginal rate of substitution (MRS). MRS is undefined if m (slope) = kinked. 1. Strictly convex: Using the example of any 2 bundles on (A & B) the indifference curve and construct a line segment between them. With … Continue reading Shapes of Indifference Curves

News Flash – Canadians Don’t Use RRSP Room

Canadians are expected to contribute a record $38.6 billion towards their RRSPs in 2014 but this number is minuscule compared to the $951 billion in unused RRSP contribution room. The number of contributors from 2013 to 2014 was in fact up 3.2% Fewer than 40 per cent of Canadians between the ages of 25 and … Continue reading News Flash – Canadians Don’t Use RRSP Room

Intro to Demand Theory – How to Manage Constraints

Welcome to the next section following a discussion on utility and indifference curves (preferences of consumers). We are now into a discussion on demand theory; the previous posts are linked chronologically at the bottom of this post. Demand theory wants to explore the concept of: given constraints we must make choices among competing alternatives. Budget … Continue reading Intro to Demand Theory – How to Manage Constraints

Cobb Douglas Function – Demand Theory

In the past installments from DiscussEconomics on demand theory, now we’re venturing into the graphical and mathematical expressions of the Cobb Douglas demand function. Graphically expressed (utility maximizing) with the assumption well-behaved preferences. The interior solution characterized by two statements (the equals sign is really supposed to be three lines thus ‘is equal to): 1. … Continue reading Cobb Douglas Function – Demand Theory