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    Eco 2620 08/07/2013 19:45:00

    Chap. 1 Ten Principles of Economics

    marinal anal!sis

    o"ernmen#/mar$e# o%#comes

    marinal chanes: small incremen#al a&'%s#men#s #o plan

    r%le: chose s%ch #ha# marinal (enefi# is e)%al #o or rea#er #han

    marinal cos# *+,-+C

    mar$e# fail%re: si#%a#ion in hich mar$e# lef# on i#s on fails #o

    alloca#e reso%rces efficien#l!

    ca%ses

    1 e#ernali#!

    2 mar$e# poer

    Chap. 2 Thin$in i$e n Economis#

    economics: social science s#%&! of ho socie#! manaes i#s scarce reso%rces

    ass%mp#ions

    role of ass%mp#ions:

    1 simplif! pro(lem/s#%&!

    2 ma$e &a#a a#herin more prac#ical

    3 ma$e easier #o %n&ers#an& rela#ionships (/ "aria(les *#he

    orl& in eneral

    ce#eris pari(%s e"er!#hin else e)%al

    economic mo&els

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    roles:

    1 simplif! %n&ers#an&in

    2 pre&ic# (eha"ior

    mo&el 1 circ%lar flo &iaram

    o inner flo inp%#s/o%#p%#so o%#er flo mone!

    fac#ors of pro&%c#ion *inp%#s:

    1 lan&

    2 la(or

    3 capi#al e)%ip./mach. *ph!sical no# financial

    mo&el 2 pro&%c#ion possi(ili#ies fron#ier *PP

    o shos com(ina#ions of o%#p%# an econom! can pro&%ce i"en

    a"aila(le fac#ors of pro&%c#ion

    o ass%mp#ions *in i"en #ime:

    1 reso%rces fie&

    2 reso%rces f%ll! %#ili;e&

    3 cons#an#/fie& #echnolo!

    no#e: mo"emen# alon PP represen#s opp. cos# of one

    oo& #o pro&%ce ano#her

    o so%rces of economic ro#h:

    1 chanes in la(or reso%rces

    2 chanes in #echnolo!

    posi#i"e an& norma#i"e anal!sis

    #o schools of #ho%h#

    1 posi#i"e &eals / a! orl& is #he #heore#ical *&a#a

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    e. ,%sh #a c%#s cos#

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    )%es#ions:

    1 ho can e pro&%ce chanes in )%an#i#! &eman&e& from

    chanes in priceB

    2 if a firm an#s #o increase #o#al re"en%e *PF sho%l& i# raise or

    loer priceB

    elas#ici#! of &eman&: responsi"eness of chane in )%an#i#! &eman&e& of

    oo& #o chane in price of oo&

    EG *H I )#! &eman&e&/*H I price

    e. EG ice cream 2.0 an& !o% raise price 10H #hen fall in )%an#i#!

    &eman&e& is 20H

    EG 20H/10H 2.0

    s%ppose !o% ha"e 2 p#s alon &eman& c%r"e *P1 F1 an& *P2 F2.

    %sin mi&poin# form%laJ

    EG *F2F1/K*F2LF1/2M/*P2P1/K*P2LP1/2

    ill !iel& nea#i"e sin (%# inore

    res%l#s

    o elas#ic 1 l%%ries

    o %ni#ar! 1 in&ifferen#

    o inelas#ic D1 necessi#ies

    elas#ic: )#! &eman&e& respon&s s%(s#an#iall! #o price chanes

    inelas#ic: )#! &eman&e& respon&s onl! slih#l! #o price chanes

    1 a"aila(ili#! of close s%(s#i#%#es

    o close s%(s#i#%#es elas#ic

    o no close s%(s#i#%#es inelas#ic

    2 necessi#ies "s. l%%ries

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    o inelas#ic/elas#ic

    3 mar$e# &efini#ion

    o narrol! &efine& elas#ic

    o (roa&l! &efine& inelas#ic

    4 #ime hori;ono lon#erm elas#ic

    o shor##erm inelas#ic

    responsi"eness:

    EG 1 s%(s#an#iall! responsi"e

    EG 1 slih#l! responsi"e

    EG D 1 minimall! responsi"e

    EG infini#! perfec#l! elas#ic

    EG 0 perfec#l! inelas#ic

    elas#ic loer price

    %ni# elas#ic loer/raise price

    inelas#ic raise price

    #o#al re"en%ePF

    P=PE Price =pposi#e T@ Elas#ic

    fla##er c%r"e more elas#ic

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    s#eeper c%r"e more inelas#ic

    o#her &eman& elas#ici#ies:

    1 income elas#ici#! of &eman&

    Ei *H IF/*H I>pos. *L normal oo&

    ne. * inferior oo&

    2 cross price elas#ici#! of &eman&

    Ecp *H IF oo& 1/*H IP oo& 2

    pos. *L s%(s#i#%#e oo&

    ne. * complemen# oo&

    elas#ici#! of s%ppl!: EA*H IFs%pplie&/*H IP

    in"en#or! con#rol

    &e#erminan#s:

    1 #ime hori;on

    lon#erm elas#ic

    shor##erm inelas#ic

    2 scarce "s. a"aila(le oo&s

    a"aila(le elas#ic

    scarce inelas#ic

    Chap. 6 A%ppl!/Geman& ?o" Policies

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    con#rols on prices

    price ceilin: leal ma. price a# hich oo&s can (e sol& *(in&in

    ceilin

    o helps cons%mers

    o res%l#s in shor#aeo sellers ma! ra#ion

    o e. as pri;e free;e ren# con#rol Cana&ian &r%s

    price floor: leal min. price a# hich oo&s can (e sol& *(in&in

    floor

    o helps sellers

    o res%l#s in s%rpl%s

    o e. farm price s%ppor#s min. ae la

    #aes

    #a on (%!er (%!ers re&%ce &eman& (! amo%n# #a an& (ear

    #a (%r&en

    #a on sellers sellers re&%ce s%ppl! (! amo%n# of #a an& (ear

    #a (%r&en

    #a inci&ence: meas%re of ho pa!s #a *ho has #a (%r&en

    concl%sions

    1 #aes &isco%rae mar$e# ac#i"i#! (/c &eman&/s%ppl! are re&%ce&an& )#! of oo&s sol& &eclines

    2 (%!ers an& sellers share #a inci&ence he#her #a (%r&en is on

    (%!ers or sellers *ass%mes no# perfec#l! inelas#ic/elas#ic

    Chap. 7 Cons%mers Pro&%cers an& Efficienc! of +ar$e#s

    elfare economics: s#%&! of ho alloca#ion of reso%rces affec#s economic

    ell(ein

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    cons%mer s%rpl%s

    illinness #o pa!: ma amo%n# (%!er is illin #o pa! for oo&

    cons%mer s%rpl%s: (%!erNs illinness #o pa! for oo& min%s ac#%al

    amo%n# pai& *meas%re of cons%mer economic ell(ein

    o loer price raises cons%mer s%rpl%s larer s%rpl%s (e##er off c%s#omer*s

    more (%!ers en#er mar$e#

    pro&%cer s%rpl%s

    cos# "al%e of ha# seller m%s# i"e %p #o pro&%ce oo& *incl%&es

    ac#%al cos# an& oppor#%ni#! cos#

    pro&%cer s%rpl%s: amo%n# pai& #o seller for oo& min%s sellers cos#

    of pro&%cin oo& *meas%re of pro&%cer economic ell(ein

    o hiher price raises pro&%cer s%rpl%s

    larer s%rpl%s (e##er off pro&%cers

    more sellers en#er mar$e#

    mar$e# efficienc!

    #o#al s%rpl%s cons%mer s%rpl%s L pro&%cer s%rpl%s

    o if #o#al s%rpl%s is maim%m mar$e# is efficien#

    e"al%a#in mar$e# e):

    1 free mar$e#s alloca#e s%ppl! of oo&s #o (%!ers ho "al%e#hem mos# hihl!

    2 free mar$e#s alloca#e &eman& of oo&s #o sellers ho

    pro&%ce a# leas# cos#

    3 free mar$e#s pro&%ce )#! of oo&s #ha# maimi;es #o#al

    s%rpl%s

    ca%ses of mar$e# inefficiencies

    1 o". policies

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    2 e#ernali#ies

    3 mar$e# fail%re

    Chap. 8 pplica#ion: Cos#s of Taa#ion

    re"ie #a sharin:

    1 #a places e&e (/ (%!ers an& sellers *rear&less ho #a

    falls on

    2 )%an#i#! of oo&s falls

    &ea&eih# loss of #aa#ion

    #a re"en%e #a )#! sol&

    &ea&eih# loss: fall in #o#al s%rpl%s from mar$e# &is#or#ion *e.

    #aes

    o cons%mer an& pro&%cer s%rpl%ses (o#h fall

    o fall in (o#h s%rpl%ses ecee&s #a re". so &ea&eih# loss is

    loss #o (o#h (%!ers an& sellers *opp. cos# no# offse# (!

    increase in #a re". *lea$ae ha# o". &oes no# e#

    represen#s los# pro&%c#ion an& cons%mp#ion

    &e#erminan#s of &ea&eih# loss

    $e! p#. price elas#ici#ies of &eman&/s%ppl! &e#ermine amo%n# of&ea&eih# loss

    concl%sions

    1 #a raises price pai& (! (%!ers so #he! cons%me less

    2 #a loers price recei"e& (! sellers so #he! pro&%ce less

    3 rea#er elas#ici#! of &eman&/s%ppl! rea#er &ea&eih# loss

    4 larer #a larer &ea&eih# loss

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    no#e: if #a is so lare re&%ces mar$e# )#! so m%ch #a raises small

    amo%n# of re"en%e affer c%r"e

    Chap. 9 pplica#ion: >n#Nl Tra&e

    orl& price: price of oo& #ha# pre"ails in orl& mar$e# for #ha# oo&s

    no#e: can (e hiher/loer #han &omes#ic price

    inners an& losers from #ra&e

    epor#in co%n#r! ins if orl& price is rea#er #han &omes#ic price

    o res%l#

    s%rpl%s a# orl& price so epor# s%rpl%s

    cons%mer s%rpl%s falls

    pro&%cer s%rpl%s rises

    #o#al s%rpl%s rises

    o concl%sion

    &omes#ic pro&%cers/ cons%mers (e##er/orse off

    #ra&e raises economic ell(ein *ains losses

    impor#in co%n#r! ins if orl& price is less #han &omes#ic price

    o res%l#

    shor#ae a# orl& price so impor# shor#ae

    cons%mer s%rpl%s rises pro&%cer s%rpl%s falls

    #o#al s%rpl%s rises

    o concl%sion

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    &omes#ic pro&%cers/cons%mers orse/(e##er off

    #ra&e raises economic ell(ein *ains losses

    mar$e# &is#or#ion effec# on #ra&e

    #ariff: #a on oo&s pro&%ce& a(roa& an& sol& &omes#icall!o res%l#

    &omes#ic price rises

    cons%mer s%rpl%s falls

    pro&%cer s%rpl%s rises

    impor#s re&%ce&

    o". e#s re"en%e

    impor# )%o#a: limi# on oo&s pro&%ce& a(roa& an& sol& &omes#icall!

    o res%l#

    &omes#ic price rises

    cons%mer s%rpl%s falls

    pro&%cer s%rpl%s rises

    re&%ce& impor#s

    no o". re"en%e (enefi# oes #o &omes#ic pro&%cers

    concl%sions

    1 #ariffs an& impor# )%o#as raise &omes#ic price of oo&

    2 cons%mers orse off pro&%cers (e##er off3 &ea&eih# loss crea#e&

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    ar%men#s for res#ric#in #ra&e

    1 'o(s

    2 na#ional sec%ri#!

    3 infan# in&%s#r!

    4 %nfair compe#i#ion5 (arainin chip

    6 main#ain &omes#ic mar$e# poer

    Chap. 13 Cos#s of Pro&%c#ion

    pro&%c#ion an& cos#s

    pro&%c#ion f%nc#ion: rela#ionship (/ )#! of inp%#s %se& #o ma$e

    oo& an& )#! of o%#p%# of #ha# oo&

    marinal pro&%c# *+P: increase in o%#p%# from a&&i#ional %ni# of

    inp%# *or$er

    o +P I #o#al o%#p%#/I no. of or$ers

    la of &iminishin marinal pro&%c#: marinal pro&%c# of inp%#

    &eclines as )#! of o%#p%#s increases

    meas%res of cos# *shor#r%n

    fie& cos#s *C: cos#s #ha# &o no# "ar! / )#! of o%#p%# pro&%ce&

    "aria(le cos#s *OC: cos#s #ha# "ar! / )#! of o%#p%# pro&%ce& #o#al cos#s *TC: fie& pl%s "aria(le cos#s

    o TC C L OC

    a"erae fie& cos# *C C/*)#! of o%#p%#

    a"erae "aria(le cos# *OC OC/*)#! of o%#p%#

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    a"erae #o#al cos# *TC TC/*)#! of o%#p%#

    marinal cos# ITC/*I )#! of o%#p%#

    o(ser"a#ions of cos# c%r"es

    1 C con#in%o%sl! falls as fie& cos#s are sprea& o%# o"er la(orinp%#

    2 OC is shape& rises as &iminishin +P se#s in

    3 TC is shape& rises as &iminishin +P se#s in

    4 +C is risin as &iminishin +P se#s in

    5 +C in#ersec#s TC a# i#s minim%m efficien# scale )#! of

    o%#p%# #ha# minimi;es TC

    no#e:

    1 hen +C TC TC is increasin (/c of sinifican# effec#s of

    &iminishin +P

    2 hen +C D TC TC is &ecreasin (/ of no or insinifican#

    effec#s of &iminishin +P *speciali;a#ion

    cos#s in shor# an& lon r%n

    shor#r%n: perio& of #ime hen some cos#s are fie& *i.e. m%s# hire

    more or$ers #o increase o%#p%#

    lonr%n: perio& of #ime hen are cos#s (ecome "aria(le *i.e. firmcan epan& (l& p%rchase ne capi#al #o increase o%#p%#

    no#e: lon r%n TC *TC #races (es# shor# r%n TC possi(ili#ies for

    each firmNs si;e

    economies of scale *as F increases TC &ecreases

    reasons

    1 speciali;a#ion of la(or

    2 increasin efficienc! of capi#al

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    3 in&i"isi(le inp%#s canN# (e scale& &on *(ro$en %p all

    cos# is %pfron#

    &iseconomies of scale *as F increases TC increases

    reasonso 1 (%rea%crac!

    o 2 %nions

    o coor&ina#ion pro(lems

    o increasin inp%# cos#s

    cons#an# re#%rns #o scale *as F increases TC remains cons#an#

    Chap. 14 irms in Compe#i#i"e +ar$e#s

    ha# is compe#i#i"e mar$e#

    1 man! (%!ers/sellers

    2 no in&i"i&%al can infl%ence mar$e# price *firms are price #a$ers

    3 oo&s offere& are larel! same of i&en#ical

    4 firms can freel! en#er/ei# mar$e# *fe (arriers

    meas%res of re"en%e

    a"erae re"en%e *@ T@/*)#! of o%#p%# marinal re"en%e *+@ IT@/*I )#! of o%#p%#

    no#e: ,/c T@ P F an& is fie& in mar$e# *price #a$er chanes in T@

    are propor#ional #o chanes in F. %r#hermore P +@ @ an& is firmNs

    &eman& c%r"e *perfec#l! elas#ic.

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    profi# maimi;a#ion

    chap. 13

    o economic profi# #o#al re"en%e #o#al cos#

    here #o#al cos# eplici# *ac#%al cos# L implici# *opp. cos#acco%n# profi# #o#al re"en%e eplici# cos#

    implica#ions

    1 economic profi# normall! less #han acco%n# profi#

    2 ;ero #olerance profi# means acco%n#in profi# is pos.

    chap. 14

    o profi# maimi;a#ion r%les *shor#r%n:

    1 #o maimi;e profi# pro&%ce a# o%#p%# a#

    hich +@ +C

    2 if +@ +C increase o%#p%#

    3 if +@ D +C &ecrease o%#p%# *or s#op increasin

    no#e: +C c%r"e is firmNs s%ppl! c%r"e

    al#erna#i"e form%la for profi#:

    profi# T@ TC

    profi# *T@/F TC/F Fprofi# *P TC F

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    shor# r%n an& lon r%n &ecisions:

    firm ma! &eci&e #o #emporaril! sh%# &on

    o if i# sh%#s &on

    1 loses all re"en%e

    2 pa!s fie& cos# (%# sa"es "aria(le cos#3 sh%#s &on if re"en%e *T@ D "aria(le cos# *OC

    P D OC sh%#&on con&i#ion

    4 P OC sh%#&on poin# *min. of OC c%r"e

    firm ma! &eci&e #o ei# mar$e#

    o if i# ei#s

    1 loses all re"en%e

    2 sa"es on fie& an& "aria(le cos#s

    3 ei#s if re"en%e *T@ cos# *TC

    P D TC ei# con&i#ion

    4 P TC ei#/en#r! price *min. of TC c%r"e

    s%ppl! c%r"es in compe#i#i"e mar$e#

    shor# r%n

    o ass%me rela#i"el! fie& no. of firms a# i"en #ime

    1 mar$e# s%ppl! s%m of in&i"i&%al shor# r%n s%ppl! c%r"es

    2 shor# r%n e). is a# )#! here +@ +C *profi# is ma

    lon r%no ass%me en#r!/ei# an& firms ha"e similar cos# c%r"es

    1 if firms ini#iall! ma$in profi# *P TC ne firms en#er

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    res%l#: firms increase s%ppl! increases price

    &ecreases profi#s &ecrease

    2 if firms ini#iall! ha"e losses *P D TC eis#in firms ei#

    res%l#: firms &ecrease s%ppl! &ecreases price

    increases profi#s/losses increase/&ecrease3 remainin firms ma$e ;ero economic profi#

    4 lon r%n e). is a# )#! here P +@ +C TC *efficien#

    scale

    h! s#a! in (%siness if profi#0B

    1 T@ compensa#es #o $eep (%siness r%nnin

    main#ain mar$e# share

    3 can s#ill ma$e profi# in shor#r%n

    4 fie& cos#s *ma! (e rela#i"el! lare

    Chap. 15 +onopol!

    monopol!: firm #ha# is sole seller of pro&%c#

    charac#eris#ics

    1 no close s%(s#i#%#es or compe#i#ors

    2 price ma$er

    3 &oes no# ma$e %nlimi#e& profi#4 price chare& #!picall! ecee&s marinal cos#

    5 enerall! res%l# in inefficiencies

    h! monopolies eis#

    f%n&amen#al reason (arriers *o(s#acles #o en#r!

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    o so%rces:

    1 monopol! reso%rce: $e! reso%rce one& (! sinle

    firm

    2 o". crea#e& pa#en#s an& cop!rih# las as ell

    as p%(lic in#eres#3 na#%ral monopol! lare cos#s of pro&%c#ion *fie&

    cos#s ma$e sinle firm more efficien# economies of

    scale

    no#e: man! o". crea#e& so #he! are no# orrie& a(o%# loss of profi#

    from compe#i#ion

    pro&%c#ion/pricin &ecisions

    no#e: monopolis#s &eman& c%r"e is mar$e# &eman& c%r"e

    re"en%e of monopol!

    1 +@ is loer #han &eman& c%r"e (/c &eman& is &onar&

    slopin

    2 #!picall! P +@ (/c hen i# increases pro&%c#ion m%s#

    re&%ce price an& re"en%e falls

    profi# maimi;a#ion r%les *shor# r%n:

    1 pro&%ce a# o%#p%# hich +@ +C

    2 chare price P +@ rea#er #han +@ +C #he price on&eman& c%r"e

    3 if +@ +C increase o%#p%#

    4 if +@ D +C s#op increasin or &ecrease o%#p%#

    profi# maimi;a#ion r%les *lon r%n:

    o same

    h!B (arriers #o en#r! firm &oes no# ha"e #o accep# ;ero economic profi#.

    elfare cos# of monopol!

    monopolies are inefficien# (/cJ

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    1 pro&%ce less #han compe#i#i"e firm

    2 chare hiher price #han compe#i#i"e firm

    3 loss in #o#al s%rpl%s *&ea&eih# loss

    p%(lic polic! #oar& monopolies1 enco%rae compe#i#ion %se an#i#r%s# las

    a (rea$ %p monopolies

    ( (loc$ merers

    2 re%la#ion

    a price *marinal cos# pricin se# P +C

    lo price for cons%mer (%# loss for firm

    pro"i&e s%(si&!

    ( profi# man&a#e P TC for ;ero profi#

    hiher price for cons%mer

    no nee& for s%(si&!B

    3 #%rn in#o p%(lic onership o". r%n *less efficien#B

    4 &o no#hin

    price &iscrimina#ion

    price &iscrimina#ion: sellin same oo& #o &ifferen# c%s#omers a#

    &ifferen# prices

    o ass%mp#ions1 no ar(i#rae *(%!in oo& an& sellin a# hiher price

    2 a(ili#! #o con#rol price *price ma$er

    o h! &iscrimina#eB

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    o o%#p%# effec# if P +C increase pro&. #o increase o%#p%#

    o price effec# increasin pro&. increases #oal s%ppl! an&

    mar$e# price falls

    concl%sion: *ass%mes ma. profi#1 oliopol! price less #han monopol! more #han compe#i#i"e

    2 oliopol! )%an#i#! more #han monopol! less #han compe#i#i"e

    3 as no. of firms ros firms ac# more compe#i#i"e

    o increasin pro&. %n#il price is &ri"en #o here P +C TC

    h! li"e compe#i#i"e firmB

    (/c (! increasin pro&. #he! consi&er o%#p%# effec# price effec#

    li$e comp. firm *since no price effec# price #a$ers of

    compe#i#ion

    Chap. 16 +onopolis#ic Compe#i#ion

    monopolis#ic compe#i#ion: mar$e# here #here are man! sellers offerin

    similar (%# no# i&en#ical pro&%c#s

    charac#eris#ics

    1 man! compe#in sellers/(%!ers2 pro&%c# &ifferen#ia#ion slih# &ifferen# oo&s

    3 some free en#r!/ei#

    4 loer concen#ra#ion ra#ios #han oliopolies

    compe#i#ion / &ifferen#ia#e& pro&%c#s

    shor#r%n: li$e monopol! *shor#r%n

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    o profi# ma. is )#! here +@ +C an& P +@ alon &eman&

    c%r"e (/c pro&%c# is &ifferen#ia#e& faces &onar&

    &eman& c%r"e

    lonr%n : li$e compe#i#ion

    o (/c of fe (arriers en#r!/ei# #!picalo pro&%ce )#! here +@ +C an& chare P TC

    here economic profi# is ;ero

    mono. comp. "s. perfec# comp.

    1 ecess capaci#! mono. comps. pro&%ce a# less #han

    efficien# scale hen TC is fallin

    no#e: can increase o%#p%# hile main#ainin price an&

    increase profi# since TC is loer *%p #o eff. scale

    2 mar$ %p o"er +C

    P +C (/c of some mar$e# poer

    3 G &ecreases as pro&. increases #o eff. scale

    4 e#ernali#ies

    pro&%c# "arie#! *L

    (%siness s#ealin *

    #oo fe/man! pro&%c#s *

    a&"er#isin emphasi;e:

    1 )%ali#!

    2 (ran& name

    (/c of pro&%c# &ifferen#ia#ion P +C an& profi# is ma. *shor#r%n

    Chap. 18 +ar$e#s for ac#ors of Pro&%c#ion

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    &eman& for la(or

    is &eri"e& &eman& from firmNs &ecision #o s%ppl! oo&

    ass%mes: compe#i#i"e firm/mar$e# for la(or

    "al%e of +P *O+P: marinal pro&%c# of inp%# #imes price of o%#p%#o O+P +P Poo&

    no#e: O+P follos #ren& of +P (/c of &iminishin re#%rns

    hirin &ecisions:

    1 hire %p #o p#. here "al%e of +P e)%als ae ra#e

    O+P

    if O+P increase no. of or$ers

    if O+P D s#op increasin/&ecrease no. of or$ers

    2 O+P c%r"e is &eman& c%r"e

    fac#ors #ha# affec# &eman& for la(or:

    1 o%#p%# price as o%#p%# price increases O+P increases an& la(or

    &eman& c%r"e shif#s

    2 #echnolo!: a&"ances increase +P an& la(or &eman& c%r"e

    3 s%ppl! of o#her fac#ors a"aila(ili#! of o#her e)%ipmen# or la(or

    %se& in pro&. ca%ses la(or &eman& #o shif#

    s%ppl! of la(or:

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    s%ppl! of la(or &eri"e& from #his

    fac#ors #ha# affec# s%ppl! of la(or:

    1 chanes in #as#e more omen in la(or force shif#s la(or s%ppl!

    2 chanes in al#erna#i"e in&%s#ries people si#chin oppor#%ni#ies shif#s

    la(or s%ppl!

    3 immira#ion more immira#ion increases la(or s%ppl! shif#s la(or

    s%ppl!

    la(or mar$e# e).

    1 O+P

    2 a&'%s#s #o (alance s%ppl!/&eman& for la(or

    concl%sions: an! e"en# #ha# chanes s%ppl!/&eman& for la(or m%s# chane

    e). ae an& +P (! some amo%n# since #hese m%s# remain e)%al a# e).

    o#her fac#ors: lan& an& capi#al

    ha# &e#ermines ho m%ch oners of lan&/capi#al earn for

    respec#i"e con#ri(%#ionsB

    1 fac#or price &epen&s on p%rchase price #o on lon

    #erm "s. ren#al *%se shor# #erm

    no#e: firm compares c%rren# "al%e of +P "s. epec#e& f%#%re "al%e

    of +P #o &eci&e he#her p%rchase or ren#

    2 each fac#ors ren#al price e)%als O+P for fac#or a# e).

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    3 chane in s%ppl! of one fac#ors al#ers earnins of all o#her

    fac#ors calle& lin$aes an& &omino effec#

    consi&er min. ae la:1 a&&i#ional %nemplo!men# crea#e&

    2 or$ers ho main#ain 'o(s (enefi# from hiher ae

    on hiher pro&%c#i"i#!:

    no#e: perio& 19591973 ha& fas#es# ro#h

    3 $e! &e#erminan#s

    1 ph!sical capi#al

    2 h%man capi#al

    3 #echnolo! mos# sinifican#

    Chap. 19 Earnins/Giscrimina#ion

    &e#erminan#s of e). aes

    1 compensa#in &ifferen#ials &ifference in aes #o offse#

    nonmone#ar! charac#eris#ics of &ifferen# 'o(s

    e. shif# premi%ms *more &iffic%l# lifes#!le professors earn less #han &oc#ors / same e&%ca#ion *(%#

    ha"e more in#rinsic 'o( "al%e

    2 h%man capi#al acc%m%la#ion of in"es#men#s of people

    increases pro&%c#i"i#!

    e. on#he'o( #rainin

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    3 a(ili#! effor# chance personal here&i#ar! fac#ors

    e. ma'or "s. minor lea%e (ase(all

    4 sinalin charac#eris#ics #ha# sinal emplo!ers of hih a(ili#!

    an& po#en#ial #o increase pro&%c#i"i#!

    5 s%pers#ar phenomenon &ifferences in incomes i#hin sameocc%pa#ion (/c of #o mar$e# charac#eris#ics:

    a e"er! c%s#omer an#s #o en'o! oo& s%pplie&

    ( e"er! c%s#omer can en'o! oo& s%pplie& (/c of lo cos# "ia

    #echnolo!

    e. Ca#herine ?allaher

    TO i&ol ,ill Q%n

    6 a(o"e e). aes

    a min. ae las

    ( %nions/s#ri$es

    c efficienc! ae a(o"e e). ae pai& #o increase or$er

    pro&%c#i"i#!

    e. lea&ers pa! sales commission

    economics of &iscrimina#ion

    &iscrimina#ion: offerin &ifferen# aes *oppor#%ni#ies #o similar

    or$ers ho &iffer (! ae se race e#hnic or o#her charac#eris#ics

    no#e: &iffic%l# #o &e#ermine m%s# compare similar e&%ca#ion on

    #he'o( #rainin ser"ice !ears performance appraisals

    &o &ifferences in aes represen# &ifferences in h%man capi#al or

    o#her charac#eris#icsB

    Chap. 11 P%(lic ?oo&s/Common @eso%rces

    $in&s of oo&s

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    Eco 2620 08/07/2013 19:45:00

    oi$onomos econom!

    scarci#!: limi#e& na#%re of socie#!Ns reso%rces an& #herefore ina(ili#!

    #o pro&%ce all oo&s an& ser"ices people ish #o ha"e

    economics: s#%&! of ho socie#! manaes i#s scarce reso%rces

    mos#l! alloca#e& #hro%h com(ine& ac#ions of millions of ho%sehol&s

    an& firms

    o(ser"es ho people ma$e &ecisions *or$ (%! sa"e in"es# e#c.

    o(ser"es in#erac#ions (e#een people

    anal!;e forces an& #ren&s affec#in econom! *income ro#h

    &isa(le& pop%la#ion frac#ion increasin price ra#es e#c.

    Ten Principles of Economics

    1 people face #ra&eoffs

    o %ns an& (%##er more a socie#! spen&s on na#ional

    &efense less spen# on cons%mer oo&s

    o clean en"ironmen# "s. income le"el

    o efficienc! "s. e)%ali#!

    o"ernmen# re&is#ri(%#ion of income from rich #o poor

    re&%ces rear& for or$in har& people or$ less

    an& pro&%ce feer oo& an& ser"ices

    efficienc!: socie#al proper#! of e##in maim%m

    (enefi#s from scarce reso%rces

    e)%ali#!: socie#al proper#! of &is#ri(%#in (enefi#s

    %niforml! amon socie#!Ns mem(ers

    2 cos# of some#hin is ha# is i"en %p

    o ma$in &ecisions re)%ires comparin cos#s an& (enefi#s of

    al#erna#i"e co%rses of ac#ion

    o

    oppor#%ni#! cos#: ha#e"er m%s# (e i"en %p #o o(#ain somei#em

    3 ra#ional people #hin$ a# marin

    o ra#ional people: people ho s!s#ema#icall! an& p%rposef%ll!

    &o (es# #o achie"e o('ec#i"es i"en a"aila(le oppor#%ni#ies

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    o marinal chanes: small incremen#al a&'%s#men#s #o eis#in

    plan of ac#ion

    &ecisions rarel! (lac$/hi#e

    marinal (enefi#s "s. marinal cos#s

    a#er cheap &iamon&s epensi"e (ase& on marinal (enefi# #ha# e#ra %ni# of oo&

    o%l& !iel& hich is (ase& on %ni#s alrea&!

    possesse&

    a#er plen#if%l small +.,.

    &iamon&s rare lare +.,.

    4 people respon& #o incen#i"es

    o incen#i"e: some#hin #ha# in&%ces person #o ac# s%ch as

    p%nishmen# or rear&

    ra#ional people respon& #o incen#i"es

    hiher price in mar$e# pro"i&es incen#i"e for (%!ers #o

    cons%me less an& incen#i"e for sellers #o pro&%ce more

    5 #ra&e can ma$e e"er!one (e##er off

    o #ra&e (/ #o co%n#ries can ma$e each (e##er off

    o allos each person #o speciali;e lea&in #o (%!in rea#er

    "arie#! of oo&s an& ser"ices a# loer cos#

    6 mar$e#s are %s%all! oo& a! #o orani;e economic ac#i"i#!

    o comm%nism cen#ral planners &eci&e ha# oo&s an&ser"ices are pro&%ce& ho m%ch as pro&%ce& an& ho

    pro&%ce& an& cons%me& #hese oo&s an& ser"ices

    #heor! onl! o"ernmen# co%l& orani;e economic

    ac#i"i#! #ha# promo#e& ell(ein for co%n#r!

    o mar$e# econom!: econom! #ha# alloca#e& reso%rces #hro%h

    &ecen#rali;e& &ecisions of man! firms an& ho%sehol&s

    in#erac#in in mar$e#s for oo&s an& ser"ices

    &am Ami#hNs eal#h of Ra#ions in"isi(le han&

    lea&s ho%sehol&s an& firms #o ma$e &esira(le mar$e#

    o%#comes

    7 o"ernmen#s can some#imes impro"e mar$e# o%#comes

    o in"isi(le han& onl! or$s if o"ernmen# enforces r%les an&

    main#ains ins#i#%#ions $e! #o mar$e# econom!

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    o proper#!: a(ili#! of in&i"i&%al #o on an& eercise con#rol o"er

    scarce reso%rces

    o mar$e# fail%re: si#%a#ion in hich mar$e# on i#s on fails #o

    pro&%ce efficien# alloca#ion of reso%rces

    ca%ses e#ernali#!: impac# of one personNs ac#ions on

    ell(ein of (!s#an&er

    e. poll%#ion

    mar$e# poer: a(ili#! of sinle person *or small

    ro%p #o %n&%l! infl%ence mar$e# prices

    e. monopolies

    o mar$e# econom! rear&s people accor&in #o a(ili#! #o

    pro&%ce #hins #ha# o#her people are illin #o pa! for

    in"isi(le han& &oes no# ens%re s%fficien# foo& clo#hin

    an& heal#hcare for e"er!one

    p%(lic policies *income #a elfare s!s#em e#c.

    aim for more e)%al &is#ri(%#ion of economic ell

    (ein

    8 co%n#r!Ns s#an&ar& of li"in &epen&s on a(ili#! #o pro&%ce oo&s

    an& ser"ices

    o merica:

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    Eco 2620 08/07/2013 19:45:00

    economis#s are scien#ific #he! &e"ise #heories collec# &a#a an&

    anal!;e #o "erif! or ref%#e #hese #heories

    scien#ific me#ho&: &ispassiona#e &e"elopmen# an& #es#in of #heories

    a(o%# ho #he orl& or$s

    con&%c#in economic eperimen#s is of#en &iffic%l# an& some#imes

    impossi(le

    economis#s ha"e #o ma$e &o i#h &a#a #he orl& happens #o i"e

    #hem

    ass%mp#ions simplif! comple orl& an& ma$e easier #o %n&ers#an&

    economis#s %se &ifferen# ass%mp#ions hen s#%&!in shor#r%n an&

    lonr%n effec#s of chane

    economis#s %se mo&els #ha# omi# man! &e#ails #o sho ha# is #r%l!

    impor#an#

    circ%larflo &iaram: mo&el #ha# simplifies econom! #o incl%&e

    onl! #o #!pes of &ecision ma$ers i#h firms pro&%cin oo&s an&

    ser"ices %sin fac#ors or pro&%c#ion hile ho%sehol&s on fac#ors

    of pro&%c#ion an& cons%me pro&%ce& oo&s an& ser"ices

    o fac#ors of pro&%c#ion: inp%#s s%ch as la(or lan& an& capi#al

    *(%il&ins an& machineso ho%sehol&s an& firms in#erac# in #o mar$e#s

    mar$e#s for oo&s an& ser"ices ho%sehol&s are

    (%!ers an& firms are sellers oo&s an& ser"ices

    mar$e#s for fac#ors of pro&%c#ion ho%sehol&s are

    sellers an& firms are (%!ers inp%#s

    pro&%c#ion possi(ili#ies fron#ier: raph shoin "ario%s

    com(ina#ions of o%#p%# #ha# econom! can possi(l! pro&%ce i"en

    a"aila(le fac#ors of pro&%c#ion an& a"aila(le pro&%c#ion #echnolo!#ha# firms %se #o #%rn fac#ors in#o o%#p%#

    o efficien# o%#come econom! is e##in all i# can from

    a"aila(le reso%rces

    o &emons#ra#es #ra&eoffs #ha# socie#! faces in #erms of

    oppor#%ni#! cos# of one oo& meas%re& in #erms of ano#her

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    slope of PP is oppor#%ni#! cos#

    #ra&eoff can chane o"er #ime

    fiel&s of economics

    microeconomics: s#%&! of ho ho%sehol&s an& firms ma$e &ecisionsan& ho #he! in#erac# in specific mar$e#s

    macroeconomics: s#%&! of econom!i&e phenomena

    scien#is#s #r!in #o eplain orl&

    polic! a&"isors #r!in #o help impro"e orl&

    in"ol"es "ies on e#hics reliion an& poli#ical philosoph!

    #o #!pes of s#a#emen#s

    posi#i"e s#a#emen#s: claims #ha# a##emp# #o &escri(e orl& as i# is

    norma#i"e: claims #ha# a##emp# #o prescri(e ho orl& sho%l& (e

    reasons for &issen# amon economis#s

    economis#s ma! &isaree a(o%# "ali&i#! of al#erna#i"e posi#i"e

    #heories a(o%# ho orl& or$s

    economis#s ma! ha"e &ifferen# "al%es an& norma#i"e "ies a(o%#

    ha# polic! sho%l& #r! #o accomplish

    ca%se an& effec#

    omi##e& "aria(le: #hir& "aria(le ca%sin chanes in o#her "aria(le

    ass%me& #o (e res%l# of ano#her "aria(le

    re"erse ca%sali#! ca%ses , , ca%ses

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    Eco 2620 08/07/2013 19:45:00

    a(sol%#e a&"an#ae: a(ili#! #o pro&%ce oo& %sin feer inp%#s #han

    ano#her pro&%cer

    oppor#%ni#! cos#: ha#e"er m%s# (e i"en %p #o o(#ain some i#em

    compara#i"e a&"an#ae: a(ili#! #o pro&%ce oo& a# loer

    oppor#%ni#! cos# #han ano#her pro&%cer

    possi(le for one person #o ha"e a(sol%#e a&"an#ae in (o#h oo&s

    impossi(le for one person #o ha"e compara#i"e a&"an#ae in (o#h oo&s

    oppor#%ni#! cos# of oo& is in"erse of oppor#%ni#! cos# of oo& ,

    #ra&e can (enefi# e"er!one in socie#! (/c allos speciali;a#ion in

    ac#i"i#ies in hich #he! ha"e compara#i"e a&"an#ae for (o#h par#ies #o ain from #ra&e #ra&e price m%s# lie (/ #o

    oppor#%ni#! cos#s

    impor#s: oo&s pro&%ce& a(roa& an& sol& &omes#icall!

    epor#s: oo&s pro&%ce& &omes#icall! an& sol& a(roa&

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    s%ppl! an& &eman&: forces #ha# ma$e mar$e# economies or$ as ell

    as &e#ermine )%an#i#! of oo& pro&%ce& an& sellin price

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    normal oo&: oo& for hich increase in income lea&s #o increase in

    &eman& an& "ice "ersa

    inferior oo&: oo& for hich increase in income lea&s #o &ecrease

    in &eman& an& "ice "ersa

    s%(s#i#%#es: #o oo&s for hich increase in price of one lea&s #oincrease in &eman& for o#her an& "ice "ersa

    complemen#s: #o oo&s for hich increase in price of one lea&s #o

    &ecrease in &eman& for o#her an& "ice "ersa

    economis#s normall! &o no# #r! #o eplain #as#es (/c (ase& on

    his#orical an& ps!choloical forces (e!on& realm of economics

    eamine ha# happens hen #as#es chane

    epec#a#ions a(o%# f%#%re ma! affec# presen# &eman& for oo& or

    ser"ice

    n%m(er of (%!ers can increase/&ecrease mar$e# &eman&

    )%an#i#!

    )%an#i#! s%pplie&: amo%n# of oo&s or ser"ices #ha# sellers are

    illin an& a(le #o sell

    la of s%ppl!: claim #ha# )%an#i#! s%pplie& of oo& rises hen priceof oo& rises an& "ice "ersa

    s%ppl! sche&%le: #a(le shoin rela#ionship (/ price of oo& an&

    )%an#i#! s%pplie&

    s%ppl! c%r"e: %par& raph of rela#ionship (/ price of oo& an&

    )%an#i#! s%pplie&

    mar$e# s%ppl!: s%m of s%pplies of sellers

    chanes in s%ppl! c%r"e

    o increase in s%ppl! shif# #o rih#

    o &ecrease in s%ppl! shif# #o lef#

    a&"ances in #echnolo! raise s%ppl!

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    epec#a#ions a(o%# f%#%re ma! &e#ermine s%ppl! #o&a!

    n%m(er of sellers &e#ermines mar$e# s%ppl!

    e)%ili(ri%m: si#%a#ion in hich mar$e# price has reache& le"el a# hich)%an#i#! s%pplie& e)%als )%an#i#! &eman&e&

    e)%ili(ri%m price: price #ha# (alances )%an#i#! s%pplie& an& )%an#i#!

    &eman&e&

    e)%ili(ri%m )%an#i#!: )%an#i#! s%pplie& an& )%an#i#! &eman&e& a#

    e)%ili(ri%m price

    e)%ili(ri%m price is also mar$e#clearin price (%!ers ha"e (o%h#

    all #he! an# #o (%! an& sellers ha"e sol& all #he! an# #o sell

    s%rpl%s *ecess s%ppl!: si#%a#ion in hich )%an#i#! s%pplie& is rea#er

    #han )%an#i#! &eman&e&

    shor#ae *ecess &eman&: si#%a#ion in hich )%an#i#! &eman&e& is

    rea#er #han )%an#i#! s%pplie&

    la of s%ppl! an& &eman&: claim #ha# price of an! oo& a&'%s#s #o

    (rin )%an#i#! s%pplie& an& )%an#i#! &eman&e& in#o (alance

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    Eco 2620 08/07/2013 19:45:00

    elas#ici#!: meas%re of ho m%ch (%!ers an& sellers respon& #o

    chanes in mar$e# con&i#ions

    price elas#ici#! of &eman&: meas%re of ho m%ch )%an#i#! &eman&e&

    of oo&s respon&s #o chane in price of oo&

    elas#ic s%(s#an#ial response

    inelas#ic slih# response

    &e#erminan#s of elas#ici#!

    a"aila(ili#! of close s%(s#i#%#es

    o close/&is#an# s%(s#i#%#es elas#ic/inelas#ic

    necessi#ies "s. l%%ries

    o

    necessi#ies/l%%ries inelas#ic/elas#ico (ase& on (%!er preferences

    mar$e# &efini#ion

    o narrol!/(roa&l! &efine& elas#ic/inelas#ic

    #ime hori;on

    o lon/shor# elas#ic/inelas#ic

    price elas#ici#! of &eman& *H I )%an#i#! &eman&e&/*H I price

    mi&poin# me#ho& *F2F1/K*F2LF1/2M/*P2P1/K*P2LP1/2M

    economis#s classif! &eman& c%r"es accor&in #o elas#ici#!

    1 elas#ic

    D1 inelas#ic

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    1 %ni# elas#ic

    in #erms of raphsJ

    fla##er more elas#ic

    s#eeper less elas#ic

    #o#al re"en%e: amo%n# pai& (! (%!ers an& recei"e& (! sellers of oo&

    PF

    &epen&s on elas#ici#!

    o inelas#ic increase/&ecrease in price increase/&ecrease

    in #o#al re"en%e

    o elas#ic increase/&ecrease in price &ecrease/increase in

    #o#al re"en%e

    income elas#ici#!: meas%re of ho )%an#i#! &eman&e& chanes as

    cons%mer income chanes

    income elas#ici#! of &eman& *H I )%an#i#! &eman&e&/ *H I

    income

    #!pes of oo&s

    o normal posi#i"e

    o inferior nea#i"e

    crossprice elas#ici#! of &eman&: meas%re of ho )%an#i#! &eman&e&

    of oo& respon&s #o chane in price of ano#her oo&

    crossprice elas#ici#! of &eman& *H I )%an#i#! &eman&e& of oo&

    1/ *H I price of oo& 2

    #!pes of oo&s

    o s%(s#i#%#es posi#i"e

    o complemen#s nea#i"e

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    price elas#ici#! of s%ppl!: meas%re of ho m%ch )%an#i#! s%pplie&

    respon&s #o chanes in price

    elas#ic s%(s#an#ial chane

    inelas#ic slih# chane

    &epen&s on flei(ili#! of sellers #o chane amo%n# of oo&

    more elas#ic/inelas#ic lon/shor# #erm

    price elas#ici#! of s%ppl! *H I )%an#i#! s%pplie&/*H I price

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    Eco 2620 08/07/2013 19:45:00

    con#rols on prices can (e no# (in&in or (in&in cons#rain#

    price ceilin: leal maim%m on price a# hich oo& can (e sol&

    res%l# in shor#aes

    sellers m%s# ra#ion scarce oo&s

    e. ren# con#rol as prices

    price floor: leal minim%m on price a# hich oo& can (e sol&

    res%l# in s%rpl%ses

    e. minim%mae las

    price ceilins an& floors can (e s%(s#i#%#e& *e. ren# an& ae

    s%(si&ies (%# #hese replacemen#s cos# o"ernmen# mone! hich meanshiher #aes

    #a inci&ence: (%r&en of #a &is#ri(%#e amon "ario%s people ho

    ma$e %p econom!

    concl%sion

    1 #aes &isco%rae mar$e# ac#i"i#! )%an#i#! of #ae& oo& sol&

    is smaller in ne e)%ili(ri%m

    2 (%!ers an& sellers share #a (%r&en (%!ers pa! more sellers

    recei"e less

    lama$ers can &eci&e he#her #a comes from (%!erNs or sellerNs poc$e#

    (%# canno# leisla#e #r%e (%r&en of #a

    #a (%r&en &epen&s on forces of s%ppl! an& &eman&

    #a (%r&en falls more hea"il! on mar$e# si&e #ha# is less elas#ic

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    Eco 2620 08/07/2013 19:45:00

    elfare economics: s#%&! of ho alloca#ion of reso%rces affec#s

    economic ell(ein

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    e)%ili(ri%m of s%ppl! an& &eman& in mar$e# maimi;es #o#al (enefi#s

    recei"e& (! (%!ers an& sellers

    illinness #o pa!: maim%m amo%n# #ha# (%!er ill pa! for oo& meas%res ho m%ch (%!er "al%es oo&

    cons%mer s%rpl%s: amo%n# (%!er is illin #o pa! for oo& min%s

    amo%n# ac#%all! pai&

    meas%res (enefi# recei"e& from par#icipa#in in mar$e#

    marinal (%!er: (%!er ho o%l& lea"e mar$e# firs# if price ere an!

    hiher

    area (elo &eman& c%r"e an& a(o"e price meas%res cons%mer s%rpl%s

    cos#: "al%e of e"er!#hin seller m%s# i"e %p #o pro&%ce oo&

    meas%re of illinness #o sell

    pro&%cer s%rpl%s: amo%n# seller is pai& for oo& min%s sellerNs cos# of

    pro"i&in

    marinal seller seller ho o%l& lea"e mar$e# firs# if price ere

    an! loer

    area (elo price an& a(o"e s%ppl! c%r"e meas%res pro&%cer s%rpl%s

    #o#al s%rpl%s: s%m of cons%mer an& pro&%cer s%rpl%ses

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    "al%e #o (%!ers cos# #o sellers

    efficienc!: proper#! of reso%rce alloca#ion of maimi;in #o#al s%rpl%s

    recei"e& (! mem(ers of socie#!

    e)%i#!: proper#! of &is#ri(%#in economic prosperi#! %niforml! amon

    mem(ers of socie#!

    mar$e# o%#comes

    1 free mar$e#s alloca#e s%ppl! of oo&s #o (%!ers ho "al%e mos#

    hihl!

    2 free mar$e#s alloca#e &eman& for oo&s #o sellers ho pro&%ce

    a# leas# cos#

    3 free mar$e#s pro&%ce )%an#i#! of oo&s #ha# maimi;es #o#al

    s%rpl%s

    mar$e# poer: a(ili#! #o infl%ence prices

    e#ernali#ies: si&e effec#s #ha# affec# no# onl! pro&%cers an&

    cons%mers (%# man! o#hers

    mar$e# fail%re: ina(ili#! of some %nre%la#e& mar$e#s #o alloca#ereso%rces efficien#l!

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    Eco 2620 08/07/2013 19:45:00

    &ea&eih# loss: fall in #o#al s%rpl%s #ha# res%l#s hen #a *or some

    o#her polic! &is#or#s mar$e# o%#come

    #aes ca%se &ea&eih# losses (/c pre"en# (%!ers an& sellers from

    reali;in some ains from #ra&e

    price elas#ici#ies of s%ppl! an& &eman& &e#ermine he#her &ea&eih#

    loss from #a is lare or small

    more elas#ic/inelas#ic (ier/smaller &ea&eih# loss

    marinal #a ra#e #a on las# &ollar of earnin

    increase #a (! #imes increase &ea&eih# loss (!

    2

    #imes

    (/c #aes re&%ce mar$e# si;e #a re"en%e &oes no# con#in%all!

    increase / increase in #aes

    s%ppl!si&e economics "ies of affer an& @eaan #ha# loer #aes

    o%l& i"e people proper incen#i"e #o or$ hich o%l& raise economic

    ell(ein an& perhaps e"en #a re"en%e

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    Eco 2620 08/07/2013 19:45:00

    orl& price: price of oo& #ha# pre"ails in orl& mar$e# for oo&

    price #a$ers #a$e orl& price as i"en

    anal!sis of epor#in co%n#r!

    1 hen co%n#r! allos #ra&e an& (ecomes epor#er of oo&

    &omes#ic pro&%cers are (e##er off an& &omes#ic cons%mers are

    orse off

    2 #ra&e raises economic ell(ein of na#ion *ains losses

    anal!sis of impor#in co%n#r!

    1 hen co%n#r! allos #ra&e an& (ecomes impor#er of oo&

    &omes#ic cons%mers are (e##er off an& &omes#ic pro&%cers areorse off

    2 #ra&e raises economic ell(ein of na#ion *ains losses

    #ariff: #a on oo&s pro&%ce& a(roa& an& sol& &omes#icall!

    res%l#

    o re&%ces &omes#ic )%an#i#! &eman&e&

    o raises &omes#ic )%an#i#! s%pplie&

    #h%sJ mo"es &omes#ic mar$e# closer #o e)%ili(ri%m /o

    #ra&eo &omes#ic sellers/cons%mers (e##er/orse off

    o o"ernmen# raises re"en%e

    o#her (enefi#s of in#Nl #ra&e

    increase& "arie#! of oo&s

    loer cos#s #hro%h economies of scale phenomenon #ha# some

    oo&s can (e pro&%ce& a# lo cos# onl! if pro&%ce& in lare

    )%an#i#ies increase& compe#i#ion

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    enhance& flo of i&eas

    ar%men#s for res#ric#in #ra&e

    'o(s

    na#ionalsec%ri#! infan#in&%s#r!

    %nfaircompe#i#ion

    (araininchip

    approaches #o achie"in free #ra&e

    %nila#eral approach remo"e #ra&e res#ric#ions alone

    m%l#ila#eral approach re&%ce #ra&e res#ric#ions hile o#her

    co%n#ries &o same

    o can res%l# in freer #ra&e (/c can re&%ce #ra&e res#ric#ions

    a(roa& as ell as home

    o can pro"i&e poli#ical s%ppor#

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    Eco 2620 08/07/2013 19:45:00

    in&%s#rial orani;a#ion: s#%&! of ho firmsN &ecisions a(o%# prices an&

    )%an#i#ies &epen& on mar$e# con&i#ions

    #o#al re"en%e: amo%n# #ha# firm recei"es for sale of i#s o%#p%#

    #o#al cos#: amo%n# #ha# firm pa!s #o (%! inp%#s

    profi#: firmNs #o#al re"en%e min%s i#s #o#al cos#

    profi# T@ TC

    o('ec#i"e ma$e profi# as lare as possi(le

    cos# of pro&%c#ion s%m of eplici# an& implici# cos#s

    eplici# cos#s: inp%# cos#s #ha# re)%ire o%#la! of mone! (! firm

    implici# cos#s: inp%# cos#s #ha# &o no# re)%ire o%#la! of mone! (!

    firm

    economis#s eplici# an& implici# cos#s

    acco%n#an#s eplici# cos#s

    economic profi#: #o#al re"en%e min%s #o#al cos#s *eplici# an& implici#

    cos#s

    acco%n# profi#: #o#al re"en%e min%s #o#al eplici# cos#

    pro&%c#ion f%nc#ion: rela#ionship (/ )%an#i#! of inp%#s %se& #o ma$e oo&

    an& )%an#i#! of o%#p%# of oo&

    marinal pro&%c#: increase in o%#p%# #ha# arises from a&&i#ional %ni# of inp%#

    &iminishin marinal pro&%c#: proper#! here(! marinal pro&%c# of inp%#

    &eclines as )%an#i#! of inp%# increases

    opposi#e of #o#alcos# c%r"e inefficiencies lea& #o hiher cos#s

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    Eco 2620 08/07/2013 19:45:00

    mar$e# poer: a(ili#! of firm #o infl%ence mar$e# price of oo& i# sells

    compe#i#i"e mar$e#: mar$e# / man! (%!ers an& sellers #ra&in

    i&en#ical pro&%c#s so #ha# each (%!er an& seller is price #a$er

    (%!ers an& sellers price #a$ers

    firms can freel! en#er or ei# mar$e#

    a"erae re"en%e: #o#al re"en%e &i"i&e& (! )%an#i#! sol&

    for all firms e)%als price of oo&

    marinal re"en%e: chane in #o#al re"en%e from a&&i#ional %ni# sol&

    for compe#i#i"e firms e)%als price of oo&

    concl%sions:1 P @ +@ +C increase pro&%c#ion

    2 P @ +@ D +C &ecrease pro&%c#ion

    3 P @ +@ +C main#ain pro&%c#ion

    no#e: (/c firmNs +C c%r"e &e#ermines )%an#i#! of oo& firm is illin #o

    s%ppl! a# an! price +C c%r"e is also firmNs s%ppl! c%r"e

    sh%#&on: shor#r%n &ecision no# #o pro&%ce an!#hin &%rin specific perio&

    of #ime (/c of c%rren# mar$e# con&i#ions

    ei#: lonr%n &ecision #o lea"e mar$e#

    s%n$ cos#: fie& cos# #ha# canno# (e reco"ere&

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    firm sh%#s &on if re"en%e from pro&%c#ion is less #han "aria(le cos#s of

    pro&%c#ion

    T@ D OC P D OC

    firm ei#s mar$e# if re"en%e from pro&%c#ion is less #han #o#al cos#s T@ D TC P D TC

    no#e: firm ill en#er if P TC

    profi# T@ TC

    profi# *T@/F TC/F F

    profi# *P TC F

    no#e: a# en& of en#r! an& ei# process firms #ha# remain in mar$e# m%s#

    ma$e ;ero economic profi# *P TC +C

    TC +C a# minim%m of a"erae #o#al cos#

    o in lonr%n e)%ili(ri%m firms opera#e a# efficien# scale

    incl%&es oppor#%ni#! cos#s acco%n#in profi# is posi#i"e

    no#e: (/c firms en#er an& ei# more easil! in lonr%n #han shor#r%n

    lonr%n s%ppl! c%r"e #!picall! more elas#ic #han shor#r%n s%ppl! c%r"e

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    Eco 2620 08/07/2013 19:45:00

    monopol!: firm #ha# is sole seller of pro&%c# /o close s%(s#i#%#es

    (arriers #o en#r!

    o monopol! reso%rce $e! reso%rce re)%ire& for pro&%c#ion

    is one& (! sinle firm

    o o"ernmen# re%la#ion o"ernmen# i"es sinle firm

    ecl%si"e rih# #o pro&%ce some oo& or ser"ice

    o pro&%c#ion process sinle firm can pro&%ce o%#p%# a#

    loer cos# #han larer n%m(er of pro&%cers

    na#%ral monopol!: monopol! #ha# arises (/c sinle firm

    can s%ppl! oo& or ser"ice #o en#ire mar$e# a# smaller

    cos# #han #o or more firms

    o%#p%# effec# more o%#p%# sol& hich #en&s #o increase #o#alre"en%e

    price effec# price falls hich #en&s #o &ecrease #o#al re"en%e

    price &iscrimina#ion: (%siness prac#ice of sellin same oo& a# &ifferen#

    prices #o &ifferen# c%s#omers

    pre"en#e& (! ar(i#rae process of (%!in oo& in one mar$e#

    an& sellin in ano#her mar$e# a# hiher price

    perfec# price &iscrimina#ion: si#%a#ion in hich monopolis# $nos

    eac#l! illinness #o pa! of each c%s#omer an& can chare each

    c%s#omer &ifferen# price

    e. mo"ie #ic$e#s airline prices &isco%n# co%pons financial ai&

    )%an#i#! &isco%n#s

    o"ernmen# response #o monopol!

    increase compe#i#ion in monopoli;e& in&%s#ries

    re%la#e monopoliesN (eha"ior

    #%rnin pri"a#e monopolies in#o p%(lic en#erprises &oin no#hin a# all

    s!neries merers mean# #o loer cos#s #hro%h more efficien#

    'oin# pro&%c#ion ra#her #han compe#i#ion re&%c#ion

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    Eco 2620 08/07/2013 19:45:00

    oliopol!: mar$e# s#r%c#%re in hich onl! fe sellers offer similar or

    i&en#ical pro&%c#s

    seller can ha"e lare impac# on profi#s of o#her sellers

    in#er&epen&en# firms

    ame #heor!: s#%&! of ho people (eha"e in s#ra#eic si#%a#ions

    &%opol!: simples# oliopol! / #o mem(ers

    car#el: ro%p of firms ac#in in %nison

    coll%sion: areemen# amon firms o"er pro&%c#ion an& price

    in effec# forms monopol!

    hin&ranceso o"ernmen# an#i#r%s# las prohi(i# eplici# areemen#s

    o s)%a((les o"er ho #o &i"i&e profi#

    Rash e)%ili(ri%m: si#%a#ion in hich economic ac#ors in#erac#in / one

    ano#her choose (es# s#ra#e! i"en s#ra#eies all o#her ac#ors ha"e chosen

    o%#p%# effec#: (/c price +C sellin 1 more %ni# ill raise profi#

    price effec#: raisin pro&%c#ion ill increase #o#al amo%n# sol& hich ill

    loer price an& profi# on all o#her %ni#s sol& *no#e: effec# &isappears /

    more an& more firms

    prisonersN &ilemma: par#ic%lar ame (/ #o cap#%re& prisoners #ha#

    ill%s#ra#es h! coopera#ion is &iffic%l# #o main#ain e"en hen m%#%all!

    (eneficial

    &ominan# s#ra#e!: s#ra#e! (es# for pla!er in ame rear&less of s#ra#eies

    chosen (! o#her pla!ers

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    resale price main#enance *fair #ra&e: man&a#e of firm #o re#ailer #o sell oo&

    a# specific price

    pre"en#s freeri&er pro(lem

    no incen#i"e #o &isco%rae compe#i#ion amon re#ailers

    no#e: (%siness prac#ices #ha# appear #o re&%ce compe#i#ion ma! ha"e

    lei#ima#e p%rposes

    pre&a#or! pricin: firmNs price c%#s in#en&e& #o &ri"e ano#her firm o%#

    of mar$e# #o recap#%re monopol! an& raise prices aain

    no#e: firms ha"e #o (alance o%#p%# an& price effec#s

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    Eco 2620 08/07/2013 19:45:00

    imperfec# compe#i#ion: si#%a#ion of man! in&%s#ries #ha# fall

    somehere (/ polar cases of perfec# compe#i#ion an& monopol!

    e. oliopol!: mar$e# s#r%c#%re in hich fe sellers offer similar or

    i&en#ical pro&%c#s

    o concen#ra#ion ra#io: meas%re of mar$e# &omina#ion (! small

    n%m(er of firmsS percen#ae of #o#al o%#p%# in mar$e# (! fo%r

    lares# firms

    o monopolis#ic compe#i#ion: mar$e# s#r%c#%re in hich man!

    firms sell pro&%c#s #ha# are similar (%# no# i&en#ical

    man! sellers

    pro&%c# &ifferen#ia#ion

    free en#r!/ei#

    monopolis#icall! compe#i#i"e firm chooses )%an#i#! an& price '%s# as

    monopol! &oes similar in shor# r%n

    profi#s/losses enco%raes en#r!/ei# hich shif#s &eman& c%r"es face&

    (! inc%m(en# firms #o lef#/rih# %n#il ;ero economic profi#

    no#e: P +C (%# TC

    ecess capaci#!: more profi#a(le pro&%c#ion (elo efficien# scale (!

    monopolis#ic compe#i#i"e firms

    mar$%p o"er marinal cos#: price ecee&in marinal cos# (/c firm has

    some mar$e# poer

    e#ernali#ies

    mar$%p of price o"er marinal cos# &ea&eih# loss

    n%m(er of firms ma! no# (e i&eal #oo m%ch/li##le en#r!o pro&%c#"arie#! *L

    o (%sinesss#ealin *

    a&"er#isin firms sellin &ifferen#ia#e& pro&%c#s a(o"e marinal

    cos# ha"e incen#i"e #o a##rac# more (%!ers

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    #hree mos# impor#an# lan& la(or an& capi#al

    &eman& for fac#or of pro&%c#ion &eri"e& &eman& from &ecision

    #o s%ppl! oo& in ano#her mar$e#

    pro&%c#ion f%nc#ion: rela#ionship (/ )%an#i#! of inp%#s %se& inpro&%c#ion an& )%an#i#! of o%#p%# from pro&%c#ion

    marinal pro&%c# of la(or: increase in amo%n# of o%#p%# from

    a&&i#ional %ni# of la(or

    &iminishin marinal pro&%c#: proper#! here(! marinal pro&%c#

    of inp%# &eclines as )%an#i#! of inp%# increases

    "al%e of marinal pro&%c#: marinal pro&%c# of inp%# #imes price of

    o%#p%#

    o marinal re"en%e pro&%c# e#ra re"en%e firm e#s from

    hirin a&&i#ional %ni# of fac#or of pro&%c#ion

    o O+P +P Poo&

    compe#i#i"e profi#maimi;in firm hires or$ers %p #o poin# here

    O+P e)%als ae

    O+P c%r"e is la(or&eman& c%r"e for compe#i#i"e profi#maimi;in

    firm

    ca%ses #ha# shif# la(or&eman& c%r"e

    o%#p%# price

    #echnoloical chane

    o la(ora%men#in increase& O+P

    o la(orsa"in &ecrease& O+P

    s%ppl! of o#her fac#ors

    ca%ses #ha# shif# la(ors%ppl! c%r"e

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    Eco 2620 08/07/2013 19:45:00

    compensa#in &ifferen#ial: &ifference in aes arisin from

    nonmone#ar! charac#eris#ics of &ifferen# 'o(s

    e. hiher aes for more &anero%s/%n&esira(le/&iffic%l# 'o(s

    h%man capi#al: acc%m%la#ion of in"es#men#s in people

    e. e&%ca#ion

    poor are e##in poorer hile rich are e##in richer increasin

    in#erna#ional #ra&e an& #echnoloical chane

    a(ili#! effor# an& chance

    e. sales commission chanin mar$e# con&i#ions

    (ea%#! inna#e a(ili#! or in&irec# a(ili#! or &iscrimina#ionB

    sinalin e&%ca#ion &oesnN# raise pro&%c#i"i#! (%# ra#her sinals

    hiher a(ili#!

    con#rar! #o h%mancapi#al #heor! pro(a(l! mi of (o#h

    s%pers#ar phenomenon

    e. (es# a#hle#e/ac#or ma$es more #han (es# pl%m(er/carpen#er

    a(o"ee)%ili(ri%m aes

    minim%mae las

    %nion: or$er associa#ion #ha# (arains / emplo!ers o"er aes

    an& or$in con&i#ions

    o s#ri$e: orani;e& i#h&raal of la(or from firm (! %nion

    efficienc! aes: a(o"ee)%ili(ri%m aes pai& (! firms #o increase

    or$er pro&%c#i"i#!

    &iscrimina#ion: offerin of &ifferen# oppor#%ni#ies #o similar in&i"i&%als

    ho &iffer onl! (! race e#hnic ro%p se ae or o#her personal

    charac#eris#ics

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    charac#eris#ics of oo&s

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    pro(lems

    o no o(ser"a(le price sinals hen e"al%a#in

    o nonmone#ar! (enefi#s e. h%man life

    Trae&! of #he Commons: para(le ill%s#ra#in h! common reso%rcesare %se& more #han is &esira(le from s#an&poin# of socie#!

    no one famil! or person has incen#i"e #o re&%ce si;e of floc$ (/c

    in&i"i&%al con#ri(%#ion represen#s small par# of pro(lem

    pre"en#a#i"e s#eps &i"i&e lan& amon families e. 17#h

    cen#%r! enclos%re mo"emen# in Enlan&

    common oo&s

    clean air an& a#er

    cones#e& roa&s

    fish hales an& o#her il&life

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    na#ional o"ernmen#

    receip#s

    o #a lia(ili#!: ho m%ch oe& in #aes (! a famil!

    (ase& on #o#al income

    o marinal #a ra#e: #a ra#e applie& #o each a&&i#ional &ollar of

    income

    o social ins%rance #aes: #aes #ha# enera#e re"en%e #o pa! for

    Aocial Aec%ri#! an& +e&icare

    pa!roll #a: #a on aes #ha# firm pa!s i#s or$ers

    o corpora#e income #a: #a on corpora#ion (ase& on i#s profi#

    corpora#ion: (%siness #ha# is se# %p as separa#e leal

    en#i#!

    o

    ecise #aes: #aes n specific oo&s li$e asoline ciare##esan& alcoholic (e"eraes

    spen&in

    o #ransfer pa!men#: o"ernmen# pa!men# no# ma&e in

    echane for oo& or ser"ice

    o (%&e# &efici#: ecess of o"ernmen# spen&in o"er

    o"ernmen# receip#s

    o (%&e# s%rpl%s: ecess of o"ernmen# receip#s o"er

    o"ernmen# spen&in

    s#a#e an& local o"ernmen#

    receip#s

    o sales an& proper#! #aes

    o in&i"i&%al an& corpora#e income #aes

    o s%(s#an#ial f%n&s from fe&eral o"ernmen#

    o fishin/h%n#in licensin fees roa&/(ri&e #olls p%(lic

    #ranspor#a#ion fares

    spen&ino e&%ca#ion

    o p%(lic elfare #ransfer pa!men#s #o poor

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    o hiha!s

    o li(raries police ar(ae remo"al fire pro#ec#ion par$

    main#enance sno remo"al

    cons%mp#ion #a: al#erna#i"e #a s!s#em #ha# ra#her #han #ainamo%n# #ha# people earn #aes amo%n# #ha# people spen&

    o%l& no# &is#or# peopleNs sa"in &ecisions

    a"erae #a ra#e: #o#al #aes pai& &i"i&e& (! #o#al income

    marinal #a ra#e: e#ra #aes pai& on a&&i#ional &ollar of income

    l%mps%m #aes: #a #ha# is same amo%n# for e"er! person

    #a e)%i#!

    (enefi#s principle: i&ea #ha# people sho%l& pa! #aes (ase& on

    (enefi#s recei"e& from o"ernmen# ser"ices

    a(ili#!#opa! principle: i&ea #ha# #apa!ers i#h rea#er a(ili#! #o

    pa! #aes sho%l& pa! larer amo%n#s

    o "er#ical e)%i#!: i&ea #ha# #apa!ers i#h rea#er a(ili#! #o pa!

    #aes sho%l& pa! larer amo%n#s

    propor#ional #a: #a for hich hih an& lo income

    #apa!ers pa! same frac#ion of income reressi"e #a: #a for hich hihincome #apa!ers

    pa! smaller frac#ion of income #han loincome

    #apa!ers

    proressi"e #a: #a for hich hihincome #apa!ers

    pa! larer frac#ion of income #han loincome

    #apa!ers

    o hori;on#al e)%i#!: i&ea #ha# #apa!ers i#h similar a(ili#ies #o

    pa! #aes sho%l& pa! same amo%n#

    fl!paper #heor!: #heor! #ha# #a (%r&en falls li$e fl! on fl!paper #o

    here"er i# firs# lan&s rarel! "ali&

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    po"er#! ra#e: percen#ae of pop%la#ion hose famil! income falls

    (elo a(sol%#e le"el calle& po"er#! line

    po"er#! line: a(sol%#e le"el of income se# (! fe&eral o"ernmen# for

    each famil! si;e (elo hich famil! is &eeme& #o (e in po"er#!

    o race ,lac$s an& Qispanics 3 #imes more li$el! #han hi#eso ae chil&ren/el&erl! more/less li$el! #o (e mem(ers of

    poor families #han a"erae

    o famil! composi#ion femalehea&e& an& spo%seless

    families more li$el! #o li"e in po"er#!

    pro(lems in meas%rin ine)%ali#!

    in$in& #ransfers: #ransfers #o poor i"en in form of oo&s an&

    ser"ices ra#her #han casho e. foo& s#amps ho%sin "o%chers me&ical ser"ices

    o no# incl%&e& in s#an&ar& meas%remen#s of ine)%ali#!

    life c!cle: re%lar pa##ern of income "aria#ion

    permanen# income: personNs normal income

    o more rele"an# #han #ransi#or! income

    no#e: ine)%ali#! in ma#erial s#an&ar&s of li"in is m%ch smaller #han

    ine)%ali#! in ann%al income

    economic mo(ili#!

    mo"emen#s %p/&on income la&&er oo& l%c$/har& or$ or (a&

    l%c$/la;iness

    "er! fe families chronicall! li"e in po"er#!

    mos# millionaires are selfma&e

    %#ili#arianism: poli#ical philosoph! accor&in #o hich o"ernmen# sho%l&

    choose policies #o maimi;e #o#al %#ili#! of e"er!one in socie#! fo%n&e& (! Enlishmen erem! ,en#ham an& ohn A#%ar# +ill

    %#ili#!: le"el of happiness or sa#isfac#ion #ha# person recei"es from

    circ%ms#ances

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    o &iminishin marinal %#ili#!: #heor! #ha# as personNs income

    rises e#ra ell(ein &eri"e& from a&&i#ional &ollar of

    income falls

    re'ec# comple#e e)%ali;a#ion of incomes incen#i"es

    li(eralism: poli#ical philosoph! accor&in #o hich o"ernmen# sho%l&

    choose policies &eeme& '%s# as e"al%a#e& (! impar#ial o(ser"er (ehin& "eil

    of inorance

    fo%n&e& (! ohn @als

    maim%m cri#erion: claim #ha# o"ernmen# sho%l& aim #o maimi;e

    ell(ein of ors#off person in socie#!

    s#ill allos &ispari#ies in income incen#i"es

    social ins%rance: o"ernmen# polic! aime& a# pro#ec#in people

    aains# ris$ of a&"erse e"en#s

    li(er#arianism: poli#ical philosoph! accor&in #o hich o"ernmen#

    sho%l& p%nish crimes an& enforce "ol%n#ar! areemen#s (%# no# re&is#ri(%#e

    income

    fo%n&e& (! @o(er# Ro;ic$

    if income &is#ri(%#ion is '%s# res%l#s are fair no ma##er ine)%ali#!

    policies #o re&%ce po"er#! minim%mae las

    elfare: o"ernmen# prorams #ha# s%pplemen# incomes of nee&!

    nea#i"e income #a: #a s!s#em #ha# collec#s re"en%e from hih

    income ho%sehol&s an& i"es s%(si&ies #o loincome ho%sehol&s

    in$in& #ransfers

    an#ipo"er#! prorams an& or$ incen#i"es

    o or$fare: s!s#em re)%irin an! person collec#in (enefi#s #o

    accep# o"ernmen#pro"i&e& 'o(