CHAPTER 1

Summary Every nation confronts the three basic economic questions of WHAT to produce, HOW, and FOR WHOM. LO3 The factors of production include the following:

Land (including natural resources). Labor (number and skills of workers). Capital (machinery, buildings, networks). Entrepreneurship (skill in creating products, services, and processes).

What Economics is All About To this end, we rely on a combination of market signals and government interventions to forge better answers to the WHAT, HOW, and FOR WHOM questions. That is the essence of a mixed economy The need to select a single mix of output (WHAT) is necessitated by our limited capacity to produce. Scarcity results when our wants exceed our resources. LO1 The production-possibilities curve illustrates the limits to output dictated by available factors of production and technology. Points on the curve represent the different output mixes that we may choose. LO1 All production entails an opportunity cost: We can produce more of output A only if we produce less of output B. The implied reduction in output B is the opportunity cost of output A. LO2 The HOW question focuses on the choice of what inputs to use in production. It also encompasses choices made about environmental protection. LO3 The FOR WHOM question concerns the distribution of output among members of society. LO3

The goal of every society is to select the best possible (optimal) answers to the WHAT, HOW, and FOR WHOM questions. The optimal answers will vary with social values and production capabilities. LO3 The three questions can be answered by the market mechanism, by a system of central planning, or by a mixed system of market signals and government intervention. LO4 Price signals are the key feature of the market mechanism. Consumers signal their desires for specific goods by paying a price for those goods. Producers respond to the price signal by assembling factors of production to produce the desired output. LO4 Market failure occurs when the market mechanism generates the wrong mix of output, undesirable methods of production, or an inequitable distribution of income. Government intervention may fail, too, however, by not improving (or even worsening) economic outcomes. LO5 The study of economics focuses on the broad question of resource allocation. Macroeconomics is concerned with allocating the resources of an entire economy to achieve broad economic goals (e.g., full employment). Microeconomics focuses on the behavior and goals of individual market participants. LO3 economics The study of how best to allocate scarce resources among competing uses. opportunity cost The most desired goods and services that are forgone in order to obtain something else. factors of production Resource inputs used to produce goods and services; e.g., land, labor, capital, entrepreneurship. scarcity Lack of enough resources to satisfy all desired uses of those resources.

 production possibilities The alternative combinations of goods and services that could be produced in a given time period with all available resources and technology. investment Expenditures on (production of) new plant and equipment (capital) in a given time period, plus changes in business inventories. economic growth An increase in output (real GDP): an expansion of production possibilities. market mechanism The use of market prices and sales to signal desired outputs (or resource allocations). laissez faire The doctrine of leave it alone, of nonintervention by government in the market mechanism. mixed economy An economy that uses both market and nonmarket signals to allocate goods and resources. market failure An imperfection in the market mechanism that prevents optimal outcomes. externalities Costs (or benefits) of a market activity borne by a third party; the difference between the social and private costs (or benefits) of a market activity. government failure Government intervention that fails to improve economic outcomes. macroeconomics The study of aggregate economic behavior, of the economy as a whole.

 microeconomics The study of individual behavior in the economy, of the components of the larger economy. ceteris paribus the economy, of the components of the larger economy.

CHAPTER 3
Market Interactions Four separate groups of market participants:**Consumers, **Business firms, **Governments, **Foreigners factor marketsAny place where factors of production (e.g., land, labor, capital, entrepreneurship) are bought and sold

LAW OF DEMAND

Tastes (desire for this and other goods). Income (of the consumer). Other goods (their availability and price). Expectations (for income, prices, tastes).

Number of buyers. **The resulting market demand is determined by the number of potential buyers and their respective tastes, incomes, other goods, and expectations. The determinants of market supply include Technology, Factor costs, Other goods, Taxes and subsidies, Expectations, Number of sellers The equilibrium price and quantity reflect a compromise between buyers and sellers. No other compromise yields a quantity demanded that is exactly equal to the quantity supplied

Summary

Consumers, business firms, government agencies, and foreigners participate in the marketplace by offering to buy or sell goods and services, or factors of production. Participation is motivated by the desire to maximize utility (consumers), profits (business firms), or the general welfare (government agencies). LO1

All interactions in the marketplace involve the exchange of either factors of production or finished products. Although the actual exchanges can take place anywhere, we say that they take place in product markets or factor markets, depending on what is being exchanged. LO1

People who are willing and able to buy a particular good at some price are part of the market demand for that product. All those who are willing and able to sell that good at some price are part of the market supply. Total market demand or supply is the sum of individual demands or supplies. LO2

Supply and demand curves illustrate how the quantity demanded or supplied changes in response to a change in the price of that good. Demand curves slope downward; supply curves slope upward. LO2

The determinants of market demand include the number of potential buyers and their respective tastes (desires), incomes, other goods, and expectations. If any of these determinants change, the demand curve shifts. Movements along a demand curve are induced only by a change in the price of that good LO4

The determinants of market supply include technology, factor costs, other goods, taxes, expectations, and the number of sellers. Supply shifts when these underlying determinants change. LO4

The quantity of goods or resources actually exchanged in each market depends on the behavior of all buyers and sellers, as summarized in market supply and demand curves. At the point where the two curves intersect, an equilibrium pricethe price at which the quantity demanded equals the quantity suppliedwill be established. LO3

A distinctive feature of the market equilibrium is that it is the only pricequantity combination that is acceptable to buyers and sellers alike. At higher prices, sellers supply more than buyers are willing to purchase (a market surplus); at lower prices, the amount demanded exceeds the quantity supplied (a market shortage). Only the equilibrium price clears the market. LO3

Price ceilings and floors are disequilibrium prices imposed on the marketplace. Such price controls create an imbalance between quantities demanded and supplied. LO5

The market mechanism is a device for establishing prices and product and resource flows. As such, it may be used to answer the basic economic questions of WHAT to produce, HOW to produce it, and FOR WHOM. Its apparent efficiency prompts the call for laissez fairea policy of government nonintervention in the marketplace. LO3 Market Any place where goods are bought and sold. factor market Any place where factors of production (e.g., land, labor, capital, entrepreneurship) are bought and sold. product market Any place where finished goods and services (products) are bought and sold. barter The direct exchange of one good for another, without the use of money. supply The ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus.

 demand The ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus. opportunity cost The most desired goods or services that are forgone in order to obtain something else. demand schedule A table showing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus. demand curve A curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus. law of demand The quantity of a good demanded in a given time period increases as its price falls, ceteris paribus. ceteris paribus The assumption of nothing else changing. shift in demand A demand curve shows how the quantity demanded changes in response to a change in price. market demand The total quantities of a good or service people are willing and able to buy at alternative prices in a given time period; the sum of individual demands. market supply The total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus. law of supply The quantity of a good supplied in a given time period increases as its price increases, ceteris paribus. equilibrium price The price at which the quantity of a good demanded in a given time period equals the quantity supplied.

 market shortage The amount by which the quantity demanded exceeds the quantity supplied at a given price: excess demand. market surplus The amount by which the quantity supplied exceeds the quantity demanded at a given price: excess supply. price ceiling Upper limit imposed on the price of a good or service. price floor Lower limit imposed on the price of a good. government failure Government intervention that fails to improve economic outcomes. laissez faire The doctrine of leave it alone, of nonintervention by government in the market mechanism. market mechanism The use of market prices and sales to signal desired outputs (or resource allocations).

CHAPTER 4

A price cut reduces total revenue if demand is inelastic (E < 1). A price cut increases total revenue if demand is elastic (E > 1). A price cut does not change total revenue if demand is unitary elastic (E = 1).

Summary
Our desires for goods and services originate in the structure of personality and social dynamics and are not explained by economic theory. Economic theory focuses on demand that is, our ability and willingness to buy specific quantities of a good or service at various prices. LO1 Utility refers to the satisfaction we get from consumer goods and services. Total utility refers to the amount of satisfaction associated with all consumption of a product. Marginal utility refers to the satisfaction obtained from the last unit of a product. LO1 The law of diminishing marginal utility says that the more of a product we consume, the smaller the increments of pleasure we get from each additional unit. This is the foundation for the law of demand. LO1 The price elasticity of demand (E) is a numerical measure of consumer response to a change in price (ceteris paribus). It equals the percentage change in quantity demanded divided by the percentage change in price. LO2 If demand is elastic (E > 1), a small change in price induces a large change in quantity demanded. Elastic demand indicates that consumer behavior is very responsive to price changes. LO2 If demand is elastic, a price increase will reduce total revenue. Price and total revenue move in the same direction only if demand is inelastic. LO3 The shape and position of any particular demand curve depend on a consumer's income, tastes, expectations, and the price and availability of other goods. Should any of these things change, the assumption of ceteris paribus will no longer hold, and the demand curve will shift. LO4 Advertising seeks to change consumer tastes and thus the willingness to buy. If tastes do change, the demand curve will shift. LO5 *demandThe ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus.

 market demandThe total quantities of a good or service people are willing and able to buy at alternative prices in a given time period; the sum of individual demands. utilityThe pleasure or satisfaction obtained from a good or service. total utilityThe amount of satisfaction obtained from entire consumption of a product. marginal utilityThe satisfaction obtained by consuming one additional (marginal) unit of a good or service. law of diminishing marginal utilityThe marginal utility of a good declines as more of it is consumed in a given time period. ceteris paribusThe assumption of nothing else changing. law of demandThe quantity of a good demanded in a given time period increases as its price falls, ceteris paribus. demand curveA curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus. price elasticity of demandThe percentage change in quantity demanded divided by the percentage change in price. total revenueThe price of a product multiplied by the quantity sold in a given time period: p q.

CHAPTER 5
Land and capital constraints place a ceiling on potential output.

a worker's productivity (MPP) depends in part on the amount of other resources in the production process. The relative scarcity of other inputs (capital and land) constrains the marginal physical product of labor.

As this formula suggests, economic and

accounting costs will diverge whenever any factor of production is not paid an explicit wage (or rent, etc.).

Summary
Supply decisions are constrained by the capacity to produce and the costs of using that capacity. LO1 In the short run, some inputs (e.g., land and capital) are fixed in quantity. Increases in (shortrun) output result from more use of variable inputs (e.g., labor). LO1 A production function indicates how much output can be produced from available facilities using different amounts of variable inputs. Every point on the production function represents efficient production. Capacity output refers to the maximum quantity that can be produced from a given facility. LO1 Output tends to increase at a diminishing rate when more labor is employed in a given facility. Additional workers crowd existing facilities, leaving each worker with less space and machinery to work with. LO2 The costs of production include both fixed and variable costs. Fixed costs (e.g., space and equipment leases) are incurred even if no output is produced. Variable costs (e.g., labor and material) are incurred when plant and equipment are put to use. LO3 Average cost is total cost divided by the quantity produced. The ATC curve is typically Ushaped. LO3 Marginal cost is the increase in total cost that results when one more unit of output is produced. Marginal costs increase because of diminishing returns in production. LO3 The production decision is the short-run choice of how much output to produce with existing facilities. A producer will be willing to supply output only if price at least covers marginal cost. LO4 The long run is characterized by an absence of fixed costs. The investment decision entails the choice of whether to acquire fixed costs, that is, whether to build, buy, or lease plant and equipment. LO4

 supply The ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus. factors of production Resource inputs used to produce goods and services, e.g., land, labor, capital, entrepreneurship. production function A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs. marginal physical product (MPP) The change in total output associated with one additional unit of input. law of diminishing returns The marginal physical product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs. short run The period in which the quantity (and quality) of some inputs cannot be changed. long run A period of time long enough for all inputs to be varied (no fixed costs). profit The difference between total revenue and total cost. total cost The market value of all resources used to produce a good or service. fixed costs Costs of production that do not change when the rate of output is altered, e.g., the cost of basic plant and equipment. variable costs Costs of production that change when the rate of output is altered, e.g., labor and material costs. average total cost (ATC) Total cost divided by the quantity produced in a given time period.

 marginal cost (MC) The increase in total cost associated with a one-unit increase in production. production decision The selection of the short-run rate of output (with existing plant and equipment). investment decision The decision to build, buy, or lease plant and equipment: to enter or exit an industry. economic cost The value of all resources used to produce a good or service: opportunity cost.