Outline of Topics:Chapter 1:How to graph/slope of the lineCalculating percent change Percentage change = (Value in the second period Value in the first period)/Value in the first period, Then multiplied by 100.What does marginal mean? Marginal means extra or additional. Optimal decisions are made at the margin. Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost. Marginal analysis Analysis that involves comparing marginal benefits and marginal costs

Chapter 2:Comparative advantage and opportunity cost Opportunity cost- The highest valued alternative that must be given up to engage in an activity. Absolute advantage Ability to produce more of a good using the same amount of resources than your competitors Comparative advantage Ability to produce a good at a lower opportunity cost than competitorsSpecialization and gains from trade Trade The act of buying and selling Basis for trade is comparative advantage Chapter 3:Demand curves/law of demandDemand curve A curve that shows the relationship between the price of a product and the quantity of the product demanded.Law of demand The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the products will increase, and when the price of a product rises, the quantity demanded of the product will decrease.The law of demand holds for any market demand curveWhen the price of a product falls, consumer buy a larger quantity because of the substitution effect and income effectSubstitution effect The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.Income effect The change in quantity demanded of a good that results from the effect of a change in the goods price on consumers purchasing power.Shift in demandFive variables that shift market demand Income, prices of related goods, tastes, demographics and population, and expected future prices.A change in demand versus a change in quantity demandedA change in demand refers to a shift of the demand curveA shift occurs if there is a change in one of the variables other than the price of the product that affects the willingness of consumers to buy the product.A movement along the curve is a change in quantity demandedSupply curves/law of supply Supply curve Shows the relationship between the price of a product and the quantity of the product and the quantity of the product supplied Law of supply The rule that, holding everything else constant, increases in price cause increase in the quantity supplied, and decreases in price cause decrease in the quantity supplied. If only the price of the product changes, there is a movement along the supply curve, which is an increase or a decrease in the quantity supplied. Market equilibriumMarket equilibrium A situation in which quantity demanded equals quantity suppliedA market that is not in equilibrium moves towards equilibriumOnce a market is in equilibrium, it stays in equilibriumAt a competitive market equilibrium, all consumers willing to pay the market price will be able to buy as much of the product as they want, and all firms willing to accept the market price will be able to sell as much of the product as they want. So there will be no reason for the price to change unless the demand or supply curve shifts.Changes in equilibriumDemand and supply curves are constantly shifting, so the prices and quantities that represent equilibrium are constantly changing.If the demand curve shifts more than the supply curve, than the equilibrium price will increaseIf the supply curve shifts more than the demand curve, than the equilibrium price will decrease

Shift in supplyVariables that shift market supply Prices of inputs, technological change, prices of substitutes in production, number of firms in the market, and expected future prices.

Chapter 4:Surplus and efficiency (CS and PS)Consumer surplus The dollar benefit consumers receive from buying goods or services in a particular market. The difference between the highest price a consumer is willing to pay and the price the consumer actually pays.The total amount of consumer surplus in a market is equal to the area below the demand curve and above the market priceProducer surplus The dollar benefit producers receive from buying goods or services in a particular market. The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receivesThe total amount of producer surplus in a market is equal to the area above the market supply curve and below the market priceEconomic surplus in a market is the sum of CS and PSWhen the government imposes a price floor or price ceiling, the amount of economic surplus in a market is reduced.Marginal benefit equals marginal cost in competitive equilibriumTo achieve economy efficiency in market, the marginal benefit from the last unit sold should equal the marginal cost of productionEconomic surplus is at a maximum when the market is in equilibriumDeadweight loss The reduction in economic surplus resulting from a market not being in equilibriumEconomic efficiency is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximumPrice floors and price ceilings how do they work? Graphs examples, welfare effects (DWL)Producers or consumers who are dissatisfied with the competitive equilibrium can lobby the government to legally require that a different price be charged Price floor A legally determined minimum price that sellers may chargePrice ceiling - A legally determined maximum price that sellers may chargeReduces economic efficiencyBlack market A market in which buying and selling take place at prices that violate government price regulations.

Taxes ditto Taxes affect market equilibrium. It also causes a decline in economic efficiency There is a loss of consumer surplus because consumers are playing a higher price The price producers receive falls, so there is also a loss of producer surplus Some of the reduction results in tax revenue for the government The deadweight loss from tax is referred to as the excess burden of the tax A tax is efficient if it imposes a small excess burden relative to the tax revenue it raises Tax incidence The actual division of the burden of a tax between buyers and sellers in a marketChapter 5:Externalities Positive and negativeExternality is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or serviceNegative externalities result in overproduction cigarette smokePositive externalities When social benefits exceed private benefits. Result in Private benefit - The benefit received by the consumer of a good or serviceSocial benefit The total benefit from consuming a good or service including both the private benefit and any external benefitFirms make their decision about how much to produce based on these private costsPrivate costs The cost borne by the producer/supplierBut social cost is higher: The cost to society includes both the private cost and the external cost of the populationExternalities arise because of incomplete property rights, or from the difficulty of enforcing property rights in certain situationsGood property rights avoid market failure.Property rights The rights to have exclusive use of their property.

Ronald Coase argued that private parties could solve the externality problem and reach the socially efficient output through private bargaining, provided: Property rights are assigned and enforceable, and transaction costs are low.Transaction costs The cost in time an other resources that parties in the process of agreeing to and carrying out an exchange of goods or services.Coase theorem also requires that parties have full information about the costs and benefits involvedMarginal social cost/benefit under pos/neg externalityDWL of externalityIf there are negative or positive externalities, the market equilibrium will not result in the efficient quantity being produced. There will be deadweight lossExample of market failure. A situation in which the market fails to produce the efficient level of outputPigovian taxes and welfare effectsA tax of just the right size could return us to efficient level of production

Taxes only work on negative externalitiesSubisdy An amount paid to producers or consumers to encourage the production or consumption of a good.

These are known as Pigovian taxes and subsidiesThey are popular because they increase efficiency while bringing in tax revenue. Then this allows inefficiency-causing taxes in other markets to be reduced. A double dividend of taxationCommand-and-control: Involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit, or requiring firms to install specific pollution-control devicesCap-and-trade:The government establishes an allowable amount of emissions.Emissions permits are distributed.Firms can trade emissions permits.Firms with high costs of reducing pollution will buy permits form firms with low costs of reducing pollution, ensuring that Pollution is reduced at the lowest possible cost.Hence the market is used to achieve efficient pollution reduction.Chapter 6:Elasticity of demand and midpoint theoremPrice elasticity of demand is the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product.Price elasticity of demand = Percentage change in quantity demanded/Percentage change in pricePrice elasticity of demand is always negativeMidpoint theorem: Cross-price elasticity of demand The percentage change in quantity demanded of one good divided by the percentage change in the price of another goodIf the two products are substitutes then the cross-price elasticity of demand will be positive.If the two products are complements then the cross-price elasticity of demand will be negative.If the two products are unrelated then the cross-price elasticity of demand will be zeroIncome elasticity of demandA measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income.If the income elasticity of demand is positive but less than 1 then the good is normal and a necessityIf the income elasticity of demand is positive and greater than 1, then the good is normal and a luxuryIf the income elasticity of demand is negative then the good is inferiorInelastic vs elastic demand (technical definition and intuitive meaning)Elastic demand Demand inelastic when the percentage change in quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value.Inelastic demand Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value.Polar cases of perfectly elastic and perfectly inelastic demandPerfectly inelastic The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero.Perfectly elastic demand The case where the quantity demanded is infinitely responsive to price, and the price elasticity of demand equals infinity.If a demand curve is a horizontal line, it is perfectly elasticIf a demand curve is a vertical line, it is perfectly inelasticDemand elasticity and revenueKey determinants of price elasticities: Availability of close substitutes, passage of time, luxuries versus necessities, definition of the market, share of a good in the consumer budget, some estimated price elasticities of demand.Total revenue: The total amount of funds received by a seller of a good or service.When demand is inelastic, price and total revenue move in the same direction: An increase in price raises total revenue and a decrease in price reduces total revenue.When demand in elastic, price and total revenue move inversely: An increase in price reduces total revenue, and a decrease in price raises total revenueIf a demand is unit elastic, then a small change in price is exactly offset by a proportional change in quantity demanded, leaving revenue unaffected.So when demand is unit elastic, neither a decrease in price nor an increase in price affects revenueElasticity of supply and definitionsPrice elasticity of supply The responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the products price.Because supply curves are upward sloping, the price elasticity of supply will be a positive number.Whether supply is elastic or inelastic depends on the ability and willingness of firms to alter the quantity they produce as price increases.If a supply curve is a vertical line, it is perfectly inelastic. In this case, the quantity supplied is completely unresponsive to price, and the price elasticity of supply equals zero.If a supply curve is a horizontal line, it is perfectly elastic. In this case, the quantity supplied is infinitely responsive to price, and the price elasticity of supply equals infinity.Chapter 9:More comparative advantage and calculating gains from tradeCountries are better off if they specialize in producing the good for which they have a comparative advantage.They can trade for the goods for which other countries have a comparative advantage.Even if one country has an absolute advantage in making both goods, but it has a comparative advantage in only one good, then it can still benefit from trade.A situation in which a country does not trade with other countries is called autarkyBecause there is no trade, the quantities produced also represents quantities consumed.Increasing consumption through tradeTerms of trade The ratio at which a country can trade its exports for imports from other countriesCountries gain from specializing in producing goods in which they have a comparative advantage and trading for goods in which other countries have a comparative advantage.Trade restrictions Graphs, restrictions, welfare effects Free trade Trade between countries that is without government restrictions Free trade makes consumers better off. International trade helps consumers but hurts firms that are less efficient than foreign competitors The most common interference with trade are tariffs, which are taxes imposed by a government on goods imported into a country. Tariffs help domestic firms but hurts the countrys consumers and the efficiency of the countrys efficiency Quota A numerical limit a government imposes on the quantity of a good that can be imported into the country. Quota has an effect similar to that of a tariff. It is imposed by the government of the importing country. Voluntary export restraint (VER) An agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country. Quotas and VERs have similar economic effects Main purpose of most tariffs and quotas is to reduce the foreign competition that domestic firms face. By limiting imports, a quota forces the domestic price of a good above the world price.