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Econ1000-Summary.docx

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Copyright © 2009 Pearson Education. MyEconLab is a product of Pearson. Chapter 1 Summary Definition of Economics (p. 2) • All economic questions arise from scarcity—from the fact that wants exceed the resources available to satisfy them. • Economics is the social science that studies the choices that people make as they cope with scarcity. • The subject divides into microeconomics and macroeconomics. Two Big Economic Questions (pp. 3–7) • Two big questions summarize the scope of economics: 1. How do choices end up determining what, how, and for whom goods and services are produced? 2. When do choices made in the pursuit of self-interest also promote the social interest? The Economic Way of Thinking (pp. 8–10) • Every choice is a tradeoff—exchanging more of something for less of something else. • The classic guns-versus-butter tradeoff represents all tradeoffs. • All economic questions involve tradeoffs. • The big social tradeoff is that between equality and efficiency. • The highest-valued alternative forgone is the opportunity cost of what is chosen. • Choices are made at the margin and respond to incentives. Economics as Social Science and Policy Tool (pp. 11–12) • Economists distinguish between positive statements—what is—and normative statements—what ought to be. • To explain the economic world, economists create and test economic models. • Economics is used in personal, business, and government economic policy decisions. • The main policy tool is the evaluation and comparison of marginal cost and marginal benefit. Chapter 1Appendix Summary Graphing Data (pp. 15–18) • Atime-series graph shows the trend and fluctuations in a variable over time. • Across-section graph shows how the value of a variable changes across the members of a population. • Ascatter diagram shows the relationship between two variables. It shows whether two variables are positively related, negatively related, or unrelated. Graphs Used in Economic Models (pp. 18–21) • Graphs are used to show relationships among variables in economic models. • Relationships can be positive (an upward-sloping curve), negative (a downward- sloping curve), positive and then negative (have a maximum point), negative and then positive (have a minimum point), or unrelated (a horizontal or vertical curve). The Slope of a Relationship (pp. 22–24) • The slope of a relationship is calculated as the change in the value of the variable measured on the y-axis divided by the change in the value of the variable measured on the x-axis—that is, ∆y/∆x. • Astraight line has a constant slope. • Acurved line has a varying slope. To calculate the slope of a curved line, we calculate the slope at a point or across an arc. Graphing RelationshipsAmong More Than Two Variables (pp. 24–25) • To graph a relationship among more than two variables, we hold constant the values of all the variables except two. • We then plot the value of one of the variables against the value of another Chapter 2 Summary Production Possibilities and Opportunity Cost (pp. 32–34) • The production possibilities frontier, PPF, is the boundary between production levels that are attainable and those that are not attainable when all the available resources are used efficiently. • Production efficiency occurs at points on the PPF. • Along the PPF, the opportunity cost of producing more of one good is the amount of the other good that must be given up. • The opportunity cost of all goods increases as the production of the good increases. Using Resources Efficiently (pp. 35–37) • Allocative efficiency occurs when goods and services are produced at the least possible cost and in the quantities that bring the greatest possible benefit. • The marginal cost of a good is the opportunity cost of producing one more unit. • The marginal benefit from a good is the benefit received from consuming one more unit of it, measured by the willingness to pay for it. • The marginal benefit of a good decreases as the amount of the good available increases. • Resources are used efficiently when the marginal cost of each good is equal to its marginal benefit. Economic Growth (pp. 38–39) • Economic growth, which is the expansion of production possibilities, results from capital accumulation and technological change. • The opportunity cost of economic growth is forgone current consumption. Gains from Trade (pp. 40–43) • Aperson has a comparative advantage in producing a good if that person can produce the good at a lower opportunity cost than everyone else. • People gain by specializing in the activity in which they have a comparative advantage and trading with others. • Dynamic comparative advantage arises from learning-by-doing. Economic Coordination (pp. 43–45) • Firms coordinate a large amount of economic activity, but there is a limit to the efficient size of a firm. • Markets coordinate the economic choices of people and firms. • Markets can work efficiently only when property rights exist. • Money makes trading in markets more efficient. Chapter 3 Summary Markets and Prices (p. 58) • Acompetitive market is one that has so many buyers and sellers that no single buyer or seller can influence the price. • Opportunity cost is a relative price. • Demand and supply determine relative prices. Demand (pp. 59–63) • Demand is the relationship between the quantity demanded of a good and its price when all other influences on buying plans remain the same. • The higher the price of a good, other things remaining the same, the smaller is the quantity demanded—the law of demand. • Demand depends on the prices of related goods (substitutes and complements), expected future prices, income, expected future income and credit, population, and preferences. Supply (pp. 64–67) • Supply is the relationship between the quantity supplied of a good and its price when all other influences on selling plans remain the same. • The higher the price of a good, other things remaining the same, the greater is the quantity supplied—the law of supply. • Supply depends on the prices of factors of production used to produce a good, the prices of related goods produced, expected future prices, the number of suppliers, technology, and the state of nature. Market Equilibrium (pp. 68–69) • At the equilibrium price, the quantity demanded equals the quantity supplied. • At any price above equilibrium, there is a surplus and the price falls. • At any price below equilibrium, there is a shortage and the price rises. Predicting Changes in Price and Quantity (pp. 70–75) • An increase in demand brings a rise in the price and an increase in the quantity supplied.Adecrease in demand brings a fall in the price and a decrease in the quantity supplied. • An increase in supply brings a fall in the price and an increase in the quantity demanded. Adecrease in supply brings a rise in the price and a decrease in the quantity demanded. • An increase in demand and an increase in supply bring an increased quantity but an uncertain price change.An increase in demand and a decrease in supply bring a higher price but an uncertain change in quantity. Chapter 4 Summary Price Elasticity of Demand (pp. 86–92) • Elasticity is a measure of the responsiveness of the quantity demanded of a good to a change in its price, other things remaining the same. • Price elasticity of demand equals the percentage change in the quantity demanded divided by the percentage change in the price. • The larger the magnitude of the price elasticity of demand, the greater is the responsiveness of the quantity demanded to a given price change. • If demand is elastic, a cut in price leads to an increase in total revenue. If demand is unit elastic, a cut in price leaves total revenue unchanged.And if demand is inelastic, a cut in price leads to a decrease in total revenue. • Price elasticity of demand depends on how easily one good serves as a substitute for another, the proportion of income spent on the good, and the length of time elapsed since the price change. More Elasticities of Demand (pp. 93–95) • Cross elasticity of demand measures the responsiveness of the demand for one good to a change in the price of a substitute or a complement, other things remaining the same. • The cross elasticity of demand with respect to the price of a substitute is positive. The cross elasticity of demand with respect to the price of a complement is negative. • Income elasticity of demand measures the responsiveness of demand to a change in income, other things remaining the same. For a normal good, the income elasticity of demand is positive. For an inferior good, the income elasticity of demand is negative. • When the income elasticity of demand is greater than 1 (income elastic), the percentage of income spent on the good increases as income increases. • When the income elasticity of demand is less than 1 (income inelastic and inferior), the percentage of income spent on the good decreases as income increases. Elasticity of Supply (pp. 96–98) • Elasticity of supply measures the responsiveness of the quantity supplied of a good to a change in its price, other things remaining the same. • The elasticity of supply is usually positive and ranges between zero (vertical supply curve) and infinity (horizontal supply curve). • The elasticity of supply depends on resource substitution possibilities and the time frame for the supply decision. • Momentary supply refers to the response of the quantity supplied to a price change at the instant that the price changes. • Long-run supply refers to the response of the quantity supplied to a price change when all the technologically feasible adjustments in production have been made. • Short-run supply refers to the response of the quantity supplied to a price change after some of the technologically feasible adjustments in production have been made. Chapter 5 Summary ResourceAllocation Methods (pp. 108–109) • Because resources are scarce, some mechanism must allocate them. • The alternative allocation methods are market price; command; majority rule; contest; first-come, first-served; lottery; personal characteristics; and force. Demand and Marginal Benefit (pp. 110–111) • The maximum price willingly paid is marginal benefit, so a demand curve is also a marginal benefit curve. • The market demand curve is the horizontal sum of the individual demand curves and is the marginal social benefit curve. • Value is what people are willing to pay; price is what people must pay. • Consumer surplus equals value minus price, summed over the quantity bought. Supply and Marginal Cost (pp. 112–113) • The minimum supply-price is marginal cost, so a supply curve is also a marginal cost curve. • The market supply curve is the horizontal sum of the individual supply curves and is the marginal social cost curve. • Cost is what producers pay; price is what producers receive. • Producer surplus equals price minus marginal cost, summed over the quantity sold. Is the Competitive Market Efficient? (pp. 114–117) • In a competitive equilibrium, marginal social benefit equals marginal social cost and resource allocation is efficient. • Buyers and sellers acting in their self-interest end up promoting the social interest. • The sum of consumer surplus and producer surplus is maximized. • Producing less than or more than the efficient quantity creates deadweight loss. • Price and quantity regulations; taxes and subsidies; externalities; public goods and common resources; monopoly; and high transactions costs can lead to underproduction or overproduction and create inefficiency. Is the Competitive Market Fair? (pp. 118–121) • Ideas about fairness can be divided into two groups: fair results and fair rules. • Fair-results ideas require income transfers from the rich to the poor. • Fair-rules ideas require property rights and voluntary exchange. Chapter 6 Summary AHousing Market with a Rent Ceiling (pp. 130–132) • Arent ceiling that is set above the equilibrium rent has no effect. • Arent ceiling that is set below the equilibrium rent creates a housing shortage, increased search activity, and a black market. • Arent ceiling that is set below the equilibrium rent is inefficient and unfair. ALabour Market with a Minimum Wage (pp. 133–135) • Aminimum wage set below the equilibrium wage rate has no effect. • Aminimum wage set above the equilibrium wage rate creates unemployment and increases the amount of time people spend searching for a job. • Aminimum wage set above the equilibrium wage rate is inefficient and unfair, and hits low-skilled young people hardest. Taxes (pp. 135–140) • Atax raises the price paid by buyers, but usually by less than the tax. • The elasticity of demand and the elasticity of supply determine the share of a tax paid by buyers and sellers. • The less elastic the demand or the more elastic the supply, the larger is the share of the tax paid by buyers. • If demand is perfectly elastic or supply is perfectly inelastic, sellers pay the entire tax.And if demand is perfectly inelastic or supply is perfectly elastic, buyers pay the entire tax. Production Quotas and Subsidies (pp. 141–143) • Aproduction quota leads to inefficient underproduction, which raises the price. • Asubsidy is like a negative tax. It lowers the price, increases the cost of production, and leads to inefficient overproduction. Markets for Illegal Goods (pp. 144–145) • Penalties on sellers increase the cost of selling the good and decrease the supply of the good. • Penalties on buyers decrease their willingness to pay and decrease the demand for the good. • Penalties on buyers and sellers decrease the quantity of the good, raise the price buyers pay, and lower the price sellers receive. • Legalizing and taxing can achieve the same outcome as penalties on buyers and sellers. Chapter 7 Summary How Global Markets Work (pp. 154–156) • Comparative advantage drives international trade. • If the world price of a good is lower than the domestic price, the rest of the world has a comparative advantage in producing that good and the domestic country gains by producing less, consuming more, and importing the good. • If the world price of a good is higher than the domestic price, the domestic country has a comparative advantage in producing that good and gains by producing more, consuming less, and exporting the good. Winners, Losers, and the Net Gain from Trade (pp. 157–158) • Compared to a no-trade situation, in a market with imports, consumer surplus is larger, producer surplus is smaller, and total surplus is larger with free international trade. • Compared to a no-trade situation, in a market with exports, consumer surplus is smaller, producer surplus is larger, and total surplus is larger with free international trade. International Trade Restrictions (pp. 159–164) • Countries restrict international trade by imposing tariffs, import quotas, and other import barriers. • Trade restrictions raise the domestic price of imported goods, lower the quantity imported, decrease consumer surplus, increase producer surplus, and create a deadweight loss. The CaseAgainst Protection (pp. 165–169) • Arguments that protection is necessary for infant industries and to prevent dumping are weak. • Arguments that protection saves jobs, allows us to compete with cheap foreign labour, is needed to penalize lax environmental standards, and prevents exploitation of developing countries are flawed. • Offshore outsourcing is just a new way of reaping gains from trade and does not justify protection. • Trade restrictions are popular because protection brings a small loss per person to a large number of people and a large gain per person to a small number of people. Those who gain have a stronger political voice than those who lose and it is too costly to identify and compensate losers. Chapter 8 Summary Maximizing Utility (pp. 182–186) • Ahousehold’s preferences can be described by a utility schedule that lists the total utility and marginal utility derived from various quantities of goods and services consumed. • The principle of diminishing marginal utility is that the marginal utility from a good or service decreases as consumption of the good or service increases. • Total utility is maximized when all the available income is spent and when the marginal utility per dollar from all goods is equal. • If the marginal utility per dollar for goodA exceeds that for good B, total utility increases if the quantity purchased of goodAincreases and the quantity purchased of good B decreases. Predictions of Marginal Utility Theory (pp. 187–193) • Marginal utility theory predicts the law of demand. That is, other things remaining the same, the higher the price of a good, the smaller is the quantity demanded of that good. • Marginal utility theory also predicts that, other things remaining the same, the larger the consumer’s income, the larger is the quantity demanded of a normal good. • Marginal utility theory resolves the paradox of value. • Total value is total utility or consumer surplus. But price is related to marginal utility. • Water, which we consume in large amounts, has a high total utility and a large consumer surplus, but the price of water is low and the marginal utility from water is low. • Diamonds, which we buy in small quantities, have a low total utility and a small consumer surplus, but the price of a diamond is high and the marginal utility from diamonds is high. New Ways of Explaining Consumer Choices (pp. 194–195) • Behavioural economics studies limits on the ability of the human brain to compute and implement rational decisions. • Bounded rationality, bounded will-power, and bounded self-interest are believed to explain some choices. • Neuroeconomics uses the ideas and tools of neuroscience to study the effects of economic events and choices inside the human brain. Chapter 9 Summary Consumption Possibilities (pp. 204–206) • The budget line is the boundary between what a household can and cannot afford, given its income and the prices of goods. • The point at which the budget line intersects the y-axis is the household’s real income in terms of the good measured on that axis. • The magnitude of the slope of the budget line is the relative price of the good measured on the x-axis in terms of the good measured on the y-axis. • Achange in the price of one good changes the slope of the budget line.Achange in income shifts the budget line but does not change its slope. Preferences and Indifference Curves (pp. 207–210) • Aconsumer’s preferences can be represented by indifference curves. The consumer is indifferent among all the combinations of goods that lie on an indifference curve. • Aconsumer prefers any point above an indifference curve to any point on it and prefers any point on an indifference curve to any point below it. • The magnitude of the slope of an indifference curve is called the marginal rate of substitution. • The marginal rate of substitution diminishes as consumption of the good measured on the y-axis decreases and consumption of the good measured on the x-axis increases. Predicting Consumer Choices (pp. 210–214) • Ahousehold consumes at its best affordable point. This point is on the budget line and on the highest attainable indifference curve and has a marginal rate of substitution equal to relative price. • The effect of a price change (the price
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