Page | 2
x Principle of Increasing Opportunity Cost t when expanding production of any good,
first employ those resources with the lowest opportunity cost. Only after that does it
make economic sense to use resources that have higher opportunity cost.
3. Factors the Shift th}v}uÇ[W}µ]}vW}]]o]]µÀ
x Increases in productive resources or improvements in knowledge and technology cause
the PPC to shift outward.
4. Comparative Advantage and International Trade
x Nations can benefit from exchange, even though one trading partner may be more
productive than the other in absolute terms.
Chapter 3 Supply and Demand: An Introduction
1. Markets and Prices
x Quantity supplied/demanded t the total amount of a good of uniform quality that all
sellers/buyers are willing to produce/purchase at a single price during a period of time.
x Supply/demand curve t A curve or schedule showing the total quantity of a good of
uniform quality that sellers/buyers want to sell/buy at each price during a particular
period of time provided all else is constant.
x Supply as an equation t QS = a +bPS, where QS=quantity supplied, PS=supply price,
a=horizontal intercept, and b=reciprocal of slope.
x Demand as an equation t QD = c -dPD, where QD=quantity supplied, PD=supply price,
c=horizontal intercept, and d=reciprocal of slope.
x Equilibrium quantity t Q* = c-d(c-a/b+d)
2. Markets, Equilibrium, and Efficiency
x The Equilibrium Principle t a market in equilibrium leaves no unexploited opportunities
x The Efficiency Principle t economic efficiency occurs when total economic surplus is
maximized. Efficiency is an important social goal because, when the pie is larger,
everyone gets a bigger piece.
x Efficient quantity t the quantity that results in the maximum possible economic surplus
from producing and consuming the good. The level of production for which the cost and
benefit of one more unit are the same.
x Economic efficiency t condition that occurs when all goods and services are produced
and consumed at their respective socially optimal levels.
3. Explaining Changes in Price and Quantities
x Change in the quantity demanded/supplied t along the curve from a change in price.
x Change in demand/supply t shift of the entire demand/supply curve.
x Law of supply states that as price falls, ceteris paribus, supply will also fall.
x Factors that shift supply
i. A change in input prices.
ii. A change in technology.
iii. A change in expectations.