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Chapterl Ten Principals of EconomicsHow people make decisionsPrinciple 1: people face tradeoffsPrinciple 2: the cost of something is what you give up to get itPrinciple 3: rational people think at the marginPrinciple 4: people respond to incentivesHow people interactPrinciple 5: trade can make everyone better offPrinciple 6: markets are usually a good way to organize economic activityPrinciple 7: governments can sometime improve market outcomesHow the economy as a whole worksPrinciple 8: a countrys standard of living depends on its ability to produce goods and servicesPrinciple 9: prices rise when the government prints too much moneyPrinciple 10: society faces a short-term tradeoff between inflation and unemployment1. Scarcity: society has limited resources and therefore cannot produce all the goods and services people wish to have2. Economics: the study of how society manages its scarce resources3. Classic tradeoffs: guns and butter, efficiency and equity4. Efficiency: the property of the society getting the most it can from its scarce resources5. Equity: the property of distributing economic prosperity fairly among the members of society6. Opportunity cost: whatever must be given to obtain some item7. Marginal changes: small incremental adjustments to an existing plan of action8. When analyzing any policy, we must consider not only the direct effects but also the indirect effects that work through incentives9. Central planning: the central planners in the government were in the best position to guide economic activity10. Market economy: an economy that allocates resources through the decentralized decisions of many firms and households as the interact in markets for goods and services11. When the government prevents prices from adjusting normally to supply and demand, it impedes the invisible hand/s ability to coordinate the millions of firms and households that make up the economy; but the invisible hand needs government to protect it. The government can also promote efficiency and equity.12. Market failure: a situation in which the market on its own fails to produce an efficient allocation of resources13. Externality: the impact of one persons actions on the well-being of a bystander, which may cause market failure14. Market power: the ability of a single economic actor or small group of actors to have a substantial influence on market prices15. Productivity: the quantity of goods and services produced from each hour of a workers time16. Similarly, the growth rate of a nations productivity determines the growth rate of its average income17. Inflation: an increase in the overall level of prices in the economy18. Philips curve: a curve that shows the short-run tradeoff between inflation and unemployment19. Business cycle: fluctuation in economic activity, such as employment and productionSummary:1. The fundamental lessons about individual decision making are that people face tradeoffs among alternative goals, that the cost of any action is measured in terms of forgone opportunities, that rational people make decisions bycomparing marginal cost and marginal benefits, and that people change their behavior in response to the incentives they face.2. The fundamental lessons about interactions among people are that trade can be mutually beneficial, that markets are usually a good way of coordinating trade among people, and that the government can potentially improve outcomes if there is some market failure or if the market outcome is inequitable.3. The fundamental lessons about the economy as a whole are that productivity is the ultimate source of living standards, that the money growth is the ultimate source of inflation, and the society faces a short-run tradeoff between inflation and unemployment.Chapter 2 Thinking Like an Economist1. Circular-flow diagram: a visual model of the economy that shows how dollars flow through markets among households and firms2. The production possibilities frontier: a graph that shows the combination of output that the economy can possibly produce given the available factors of production and the available production technology. It shows the opportunity cost of one good as measured in terms of the other good. It shows the tradeoff between the production of different goods at a given time, but the tradeoff can change over time3. Microeconomics: the study of how households and firms make decision and how the interact in markets4. Macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and economic growth5. Positive statements: claims that attempt to describe the world as it is6. Normative statements: claims that attempt to prescribe how the world should be7. Normative statements cannot come from positive analysis alone, they involve value judgments as wellSummary:1. Economists try to address their subject with a scientific objectivity. Like all scientists, they make appropriate assumptions and build simplified models in order to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier2. The field of economics is divided into two subfields: microeconomics and macroeconomics. Macroeconomists study decision-making by households and firms and the interaction among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole.3. A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. When economists make normative statements, they are acting more as policy advisers than scientists.4. Economists who advise policymakers offer conflicting advice either because of differences in scientific judgments or because of differences in values. At other times, economists are united in the advice the offer, but policymakers may choose to ignore it.Chapter 3 Interdependence and the Gains from Trade1. Absolute advantage: the comparison among producers of a good according to their productivity2. Comparative advantage: the comparison among producers of a good according to their opportunity cost3. Imports: goods produced abroad and sold domestically4. Exports: goods produced domestically and sold abroadSummary1. Each person consumes goods and services produced by many other people both in our country and around the world. Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and# / 11variety of goods and services.2. There are two ways to compare the abilities of two people in producing a good. The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing the good. The person who has the smaller opportunity cost of producing the good is said to have a comparative advantage, the gains from trade are based on comparative advantage, not absolute advantage.3. Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage.4. The principle of comparative advantage applies to countries as well as to people. Economists use the principle of comparative advantage to advocate free trade among countries.Chapter 4 The Market Forces of Supply and Demand1. Competitive market: a market in which there are many buyer san sellers so that each has a negligible impact on the market price2. Perfect competitive markets are defined by two primary characteristics: 1 the goods offered for sale are all the same and 2 the buyers and sellers are so numerous that no single buyer or seller can influence the market price. The market determines the price; buyers and sellers are price takers.3. Monopolistically competitive market: it contains many sellers but each offers a slightly different product4. Oligopoly: it has a few sellers that do not always compete aggressively5. Monopoly: the market has only one seller and the seller sets the price6. Quantity demanded: the amount of a good that buyers are willing and able to purchase7. Law of demand: the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises8. Law of supply: the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises9. Law of supply and demand: the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of the good into balance10. Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded11. Supply schedule: a table that shows the relationship between the price of a good and the quantity supplied12. Demand curve: a graph of the relationship between the price of a good and the quantity demanded13. Supply curve: a graph of the relationship between the price of a good and the quantity supplied14. Market demand: the sum of all the individual demands for a particular good or service15. Variables that influence demand: income, price of related goods, tastes, expectations, number of buyers16. Variables that influence supply: input prices, technology, expectation, number of sellersExpectation: if the seller expects the price of a good to rise in the future, he will put some of his current production into storage and supply less to the market today17. Normal good: a good for which, other things equal, an increase in income leads to an increase in demand18. Inferior good: a good for which, other things equal, an increase in income leads to an decrease in demand19. Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other20. Complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other21. Quantity supplied: the amount of a good that sellers are willing and able to sell22. Equilibrium: a situation in which the price has reached the level where quantity supplied equals quantity demanded (there is no upward or downward pressure on the price)23. Equilibrium price(market-cleaning price): the price that balances quantity supplied and quantity demanded24. Equilibrium quantity: the quantity supplied and the quantity demanded at the equilibrium price25. Surplus: a situation in which quantity supplied is greater than quantity demanded26. Shortage: a situation in which quantity demanded is greater than quantity demanded27. When some event shifts the supply or demand curve, the equilibrium in the market changes. The analysis of such achange is called comparative statics because it involves comparing two unchanging situations - an initial and a new equilibrium.28. “Supply refers to the position of the supply curve (shift in the curve)29. “Quantity supplied7/ refers to the amount suppliers wish to sell (movement along the curve)30. In market economies, prices are the mechanism for rationing scarce resourcesSummary1. Economists use the model of supply and demand to analyze competitive markets. In a competitive market, there are many buyers and sellers, each of which has little or no influence on the market price2. The demand curve shows how the quantity of a good demanded depends on the price. According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward.3. In addition to price, other determinants of how much consumers want to buy include income, the prices of substitutes and complements, tastes, expectations and the number of buyers. If one of these factors changes, the demand curve shifts4. The supply curve shows how the quantity of a good supplied depends on the price. According to the law of supply as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward5. In addition to price, other determinants of how much producers want to sell include input prices, technology； expectations and the number of sellers. If one of these factors changes, the supply curve shifts6. The intersection of the supply and demand curves determines the market equilibrium. At the equilibrium price, the quantity demanded equals the quantity supplied7. The behavior of buyers and sellers naturally drives markets toward their equilibrium. When the market price is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. When the market price is below the equilibrium price there is a shortage, which causes the market price to rise8. To analyze how any event influences a market, we use the supply -and -demand diagram to examine how the event affects the equilibrium price and quantity. To do this we follow three steps. First, we decide whether the event shifts the supply curve or the demand curve (or both). Second, we decide which direction the curve shifts. Third, we compare the new equilibrium with the initial equilibrium9. In market economies, prices are the signals that guide economic decisions and thereby allocate scarce recourses. For every good in the economy, the price ensures that supply and demand are in balance. The equilibrium price then determines how much of the good buyers choose to purchase and how much sellers choose to produceChapter 5 Elasticity and its Application1. Elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants2. Price elasticity of demand: a measure of how much the quantity demanded of a good responds to a change in theprice of that food, computed as the percentage change in quantity demanded divided by the percentage change in price3. The price elasticity of demand for any good measures how willing consumers are to move away from the good as its price rises.4. Availability of close substitutes: goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others5. Necessities tend to have inelastic demand, whereas luxuries have elastic demands6. Definition of the market: narrowly defined markets tend to have more elastic demand than broadly defined markets7. Time horizon: goods tend to have more elastic demand over longer time horizons8. Economists compute the price elasticity of demand as the percentage change in the quantity demanded divided by the percentage change in the price9. The midpoint method: (Q2-Ql/)/(Ql+Q2)2/(P2-Pl)/(P2+Pl)/210. Perfect elastic demand, elastic demand, unit elastic demand, inelastic demand, perfect inelastic demand11. Total revenue: the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold12. When demand is inelastic, price and total revenue move in the same direction13. When demand is elastic, price and total revenue move in opposite direction14. When demand is unit elastic, total revenue remains constant when the price changes15. The slope of a linear demand curve is the ratio of changes in the two variables, whereas the elasticity is the ratio of percentage change in the two variables16. Income elasticity of demand: a measure of how much the quantity demanded of a good responds to a change in consumers income, computed as the percentage in quantity demanded divided by the percentage change in income17. Income elasticity E 0 normal good, E 1 luxury, E 1 necessity18. Cross-price elasticity: a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good. Whether the cross-price elasticity is a positive or negative number depends on whether the two good are substitutes(+) or complements(-)19. The price elasticity of supply depends on the flexibility of sellers to change the amount of the good they produceSummary1. The price elasticity of demand measures how much the quantity demanded responds to changes in the price. Demand tends to be more elastic if close substitutes are available, if the good is a luxury rather than a necessity, if the market is narrowly defined, or if buyers have substantial time to react to a price change2. The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. If the elasticity is less than one, so that quantity demanded moves proportionately less than the price, demand is said to be inelastic. If the elasticity is greater than one, so that quantity demanded moves proportionately more than the price, demand is said to be elastic3. Total revenue, the total amount paid for a good, equals the price of the good times the quantity sold. For inelastic demand curves, total revenue rises as price rises. For elastic demand curves, total revenue falls as price rises4. The income elasticity of demand measures how much the quantity demanded responds to changes in consumers income. The cross-price elasticity of demand measures how much the quantity demanded of one good responds to changes in the price of another good5. The price elasticity of supply measures how much the quantity supplied responds to changes in the price. This elasticity often depends on the time horizon under consideration. In most markets, supply is more elastic in the long run than in the short run6. The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. If the elasticity is less than one, so that quantity supplied moves proportionately less than the price, supply is said to be inelastic. If the elasticity is greater than one, so that quantity supplied moves proportionately more than the price, supply is said to be elastic7. The tools of supply and demand can be applied in many different kinds of markets. This chapter uses them to analyze the market for wheat, the market for oil and the market for illegal drugs.Chapter 13 The Cost of Production1. Total revenue: the amount a firm receives for the sales of its output2. Total cost: the market value of the inputs a firm uses in production3. Profit: total revenue minus total cost4. Explicit costs: input costs that require an outlay of money by the firm5. Implicit costs: inputs costs that do not require an outlay of money by the firm6. Economic profit: total revenue minus total cost, including both implicit and explicit costs7. Accounting profit: total revenue minus explicit cost8. Production function: the relationship between the quantity of inputs used to make a good and the quantity of output of that good9. Marginal product: the change in output that arises from an additional unit of input10. Diminishing marginal product: the property whereby the marginal product of an input declines as the quantity of the input increases11. Fixed costs: costs that do not vary with the quantity of output produced12. Variable costs: costs that do vary with the quantity of output produced13. Marginal cost: the increase in total cost that arises from an extra unit of production14. Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising.15. In many firms, diminishing marginal product does not start to occur immediately after the first worker is hired. Therefore AVC and MC is not necessarily always sloping upward16. Economies of scale: the property whereby long-run average total cost falls as the quantity of output increases； (because higher production levels allow specialization among workers)17. Diseconomies of scale: the property whereby long-run a
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