Chapter 1-15 of Economics

1. Chapter 7

1.1. consumers and producers and the efficiency of markets Consumer surplus the amount a buyer is willing to pay minus the actual price. Willingness to play (WTP) is the maximum amount a buyer’s willingness to pay for that good. The Lower Price Raises Consumer Surplus Because buyers always want to pay less for the goods they buy, a lower price makes buyers of a good better off. The Higher Price Raises Producer Surplus You will not be surprised to hear that sellers always want to receive a higher price for the goods they sell. Consumer surplus and producer surplus are the basic tools that economists use to study the welfare of buyers and sellers in a market.

2. Chapter 8

2.1. Application: the cost of taxation The change in total welfare includes the change in consumer surplus (which is negative), the change in producer surplus (which is also negative), and the change in tax revenue (which is positive). recalling that the demand curve reflects the value of the goods to consumers and that the supply curve reflects the costs of producers. When the tax raises the price to buyers to PB and lowers the price to sellers to the marginal buyers and sellers leave the market, so the quantity sold falls.

3. Chapter 9

3.1. Internal trade To analyze the welfare effects of free trade, the Isolandian economists begin with the assumption that Isoland is a small economy compared to the rest of the world. This small-economy assumption means that Isoland’s actions have little effect on world markets. Some benefits of International Trade are Increased variety of goods and Lower costs through economies of scale, Increased competition and Enhanced flow of ideas.

4. Chapter 10

4.1. In this chapter, we begin our study of another of the Ten Principles of Economics: Government. This insight is the basis for one of the Ten Principles of Economics in Chapter 1: Markets are usually a good way to organize economic activity. Should we conclude, therefore, that the invisible hand prevents firms in the paper market from emitting too much dioxin? Firms that make and sell paper also create, as a by-product of the manufacturing process, a chemical called dioxin. Scientists believe that once dioxin enters the environment, it raises the population’s risk of cancer, birth defects, and other health problems. To use Adam Smith’s famous metaphor, the “invisible hand” of the marketplace leads self-interested buyers and sellers in a market to maximize the total benefit that society derives from that market. Markets do many things well, but they do not do everything well. Is the production and release of dioxin a problem for society? In Chapters 4 through 9, we examined how markets allocate scarce resources with the forces of supply and demand, and we saw that the equilibrium of supply and demand is typically an efficient allocation of resources.

5. Chapter 11

5.1. Our analysis will shed light on Governments can sometimes improve market outcomes. The government provides others, such In this chapter, we examine the problems that arise for the allocation of resources when there are goods without market prices. Goods without prices provide a special challenge for economic analysis. For these goods, prices are the signals that guide the decisions of buyers and sellers, and these decisions lead to an efficient allocation of resources. Most goods in our economy are allocated in markets, in which buyers pay for what they receive and sellers are paid for what they provide. In each case, people do not pay a fee when they choose to enjoy the benefit of the good. In such cases, government policy can potentially remedy the market failure and raise economic well-being. Nature provides some of them, such as rivers, moun- tains, beaches, lakes, and oceans. When a good does not have a price attached to it, private markets cannot ensure that the good is produced and con- sumed in the proper amounts. • Private goods -goods that are both excludable and rival in consumption • Public goods-goods that are neither excludable nor rival in consumption • Common resources- goods that are rival in consumption but not excludable • Club goods- goods that are excludable but not rival in consumption Public Goods:  free rider- a person who receives the benefit of a good but avoids paying for it  cost–benefit analysis- a study that compares the costs and benefits to society of providing a public good Common Resources Common resources, like public goods, are not excludable: They are available free of charge to anyone who wants to use them. Common resources are, however, rival in consumption: One person’s use of the common resource reduces other people’s ability to use it. Thus, common resources give rise to a new problem. Once the good is provided, policymakers need to be concerned about how much it is used. This problem is best understood from the classic parable called the Tragedy of the Commons. • Tragedy of the Commons- a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole Conclusion The importance of property rights In In this and the previous chapter, we have seen there are some “goods” that the market does not provide adequately. For example, although no one doubts that the “good” of clean air or national defense is valu- able, no one has the right to attach a price to it and profit from its use. Instead, societies rely on the government to protect the environment and to provide for the national defense. The market does not provide for national defense because no one can charge those who are defended for the benefit they receive. When the absence of property rights causes a market failure, the government can potentially solve the problem. In all cases, the market fails to allocate resources efficiently because property rights are not well established. Sometimes, as in the sale of pollution permits, the solution is for the government to help define property rights and thereby unleash market forces. Markets do not ensure that the air we breathe is clean or that our country is defended from foreign aggressors

6. Chapter 12

6.1. Chapter 12 • budget deficit- an excess of government spending over government receipts • budget surplus- an excess of government receipts over government spending The design of the tax system- • The combination of a grow- ing elderly population and rising healthcare costs is expected to continue and even accelerate the trend. In 2010, President Obama signed a healthcare reform bill with the goal of both expanding health insurance coverage and reducing the growth of healthcare costs. A second, related trend that will affect government spending in the decades ahead is the rising cost of healthcare. Spending on these programs has risen from less than 1 percent in 1950 to about 10 percent today. As a result, there will be fewer workers paying taxes to support the government benefits that each elderly person receives. The government provides healthcare to the elderly through the Medicare system and to the poor through Medicaid. As the cost of healthcare increases, government spending on these programs will increase as well. Panel (b) of Figure 2 shows government spending on Social Security, Medicare, and Medicaid as a percentage of GDP.means means that in 1950 there were about 7 working-age people for every elderly person, whereas in 2050 there will be only 2.5. • State and Local Government- State and local governments collect about 40 percent of all taxes paid. Let’s look at how they obtain tax revenue and how they spend it. • Receipts Table 5- shows the receipts of U.S. state and local governments. Total receipts for 2007 were $2,329 billion, or $7,574 per person. The table also shows how this total is broken down into different kinds of taxes. The two most important taxes for state and local governments are sales taxes and property taxes. Sales taxes are levied as a percentage of the total amount spent at retail stores. Every time a customer buys something, he or she pays the storekeeper an extra amount that the storekeeper remits to the government. (Somestates exclude certain items that are considered necessities, such as food and clothing.) Property taxes are levied as a percentage of the estimated value of land and.. Taxes and efficiency • Deadweight Losses Taxes and Equity • benefits principle the idea that people should pay taxes based on the benefits they receive from government services Conclusion: The Trade-off between Equity and Efficiency

7. Chapter 13

7.1. Costs as Opportunity Costs Explicit Costs ● Inputs costs that require a direct outlay of money by the firm. Implicit Costs ● Inputs costs that do not require an outlay of money by the firm. Economic Profit VS Accounting Profit ● Economists measure a firm’s Economic Profit as total revenue minus total cost, including both explicit and implicit costs. ● Accountants measure the Accounting Profit as the firm’s total revenue minus only the firm’s explicit costs. ● When total revenue exceeds both explicit and implicit costs, the firm earns economic profit ● Economic profit is smaller than accounting profit Production and Costs The Production Function shows the relationship between quantity of inputs used to make a good and the quantity of output of that good. The Production Function ● The Marginal Product of any input in the production process is the increase in output that arises from an additional unit of that input. ● Diminishing Marginal Product: is property whereby the marginal product of an input declines as the quantity of the input increases.

8. Chapter 1

8.1. Chapter 1- economics Economics is the study of how society manages the scariest resources. The father of economics is Adam Smith who wrote the book wealth of nations in 1776. They are ten principles the principle of people trade off, the cost of something is what you give up to get, rational people think at the margin, people respond to incentives, trade can make everyone better off, markets are usually a good way to organize economic activity, governments can sometimes improve market out comes, a countries standard of living stands on its ability of producing goods, services and prices rise when the government prints too much money and society faces a short run trade off between inflation and unemployment .

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9. Chapter 2

9.1. Thinking like an economist The two rules that economy are scientist and policy advisor. The Role of Assumptions is the simple complex world making it easier to understand. Economic Models is a highly simplified representation of a more complicated reality, and its two factors are households and firms. A circler flow diagram is a visual it shows dollar flow in a market. The production possibilities frontier is a graph that shows the various combinations of output in this case, cars and computers that the economy can possibly produce given the available factors of production and the available production technology that firms use to turn these factors into output.

10. Chapter 3

10.1. Interdependence and the gains of trade Production Possibilities shows the various mixes of output that an economy can produce. PPF stands for the production possibilities frontier. This is important because it shows the four keys of economics which are sacristy, trade off, opportunity cost and efficiency. Shape and shift is a straight line curve and a curved line.

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11. Chapter 4

11.1. The market forces of supply and demand A market is a group of buyers and sellers. There are two types of market which are highly organized market and less organized market. The market is very completive. Monopoly is one seller that sets the prices because they are the only one in that market. The buyers determine demand. The law of demand claims that other things equal the equity demanded of a good fall when the price of the good rises. A demand curve is a graph showing the relations between price and quantity.

12. Chapter 5

12.1. Elasticity and its application Elasticity is the buyers and sellers’ responsiveness to change to price. Price of demand is the consumer respond to change in price. One is close substitutes, two is necessities vs. luxuries, three markets and four-time horizons. Price of elasticity of demand is Percentage Change in Quantity Demanded ÷ Percentage Change in Price. Income elasticity is normal goods and inferior goods. Cross price elasticity of demand measures the quantity of demand of one good change if the price of another changes. Elasticity of supply measures how much quantity supply changes if there is a change of their determinacies.

13. Chapter 6

13.1. Supply, demand and government policies Price control this has free market where buyers and sellers control the market. Price ceilings is an illegal maximum for price of a better service. Not binding price ceilings is when government imposes a price ceiling that is above the equilibrium price. Binding is when they impose a price ceiling below the equilibrium price. Binding floors is when the government imposes a price flow that is above the equilibrium price.

14. Chapter 14

14.1. Firms in a competitive market Competition is where two or more people strive for a common goal which cannot be shared. A competitive market is a structure in which no single consumer or producer has the power to influence the market. competitive Maximization & the Competition Firm’s is the goal of a competitive firm is to maximize profit, which equals total revenue minus total cost this when a business/firm aims to make as much profit as they can as quickly as possible. The supply curve in a completive market shows how much output a firm in a perfectly competitive market will supply at any given price.

15. Chapter 15

15.1. This result is clearly true in the case of Microsoft’s Windows. But this goal has very different ramifications for competitive and monopoly firms. government, for example, keeps a close eye on Microsoft’s business decisions. One of the Ten Principles of Economics in Chapter 1 is that governments can sometimes improve market outcomes. The market price of Windows is many times its marginal cost. Monopoly firms, like competitive firms, aim to maximize profit. By contrast, a monopoly charges a price that exceeds marginal cost. The marginal cost of Windows—the extra cost that Microsoft incurs by printing one more copy of the program onto a CD—is only a few dollars. By contrast, because monopoly firms are unchecked by competition, the outcome in a market with a monopoly is often not in the best interest of society. • Monopoly-a firm that is the sole seller of a product without close substitutes • Monopoly resources: A key resource required for production is owned by a single firm. • Government regulation: The government gives a single firm the exclusive right to produce some good or service. Monopoly resources • In the case of a necessity like water, the monopolist could command quite a high price, even if the marginal cost of pumping an extra gallon is low. As a result of the competition among water suppliers, the price of a gallon is driven to equal the marginal cost of pumping an extra gallon. For example, consider the market for water in a small town in the Old West.The The simplest way for a monopoly to arise is for a single firm to own a key resource. Not surprisingly, the monopolist has much greater market power than any single firm in a competitive market. If dozens of town residents have working wells, the competitive model discussed in the preceding chapter describes the behavior of sellers. Government-Created Monopolies • At other times, the government grants a monopoly because doing so is viewed to be in the public interest. Kings, for example, once granted exclusive business licenses to their friends and allies. In In many cases, monopolies arise because the government has given one person or firm the exclusive right to sell some good or service. Sometimes the monopoly arises from the sheer political clout of the would-be monopolist. • Natural Monopoly-a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms Conclusion: The Prevalence of Monopolies This chapter has discussed the behavior of firms that have control over the prices they charge. We have seen that these firms behave very differently from the competitive firms studied in the previous chapter. Table 2 summarizes some of the key similarities and differences between competitive and monopoly markets From the standpoint of public policy, a crucial result is that a monopolist produces less than the socially efficient quantity and charges a price above marginal cost. As a result, a monopoly causes deadweight losses. In some cases, these inefficiencies can be mitigated through price discrimination by the monopolist, but other times, they call for policymakers to take an active role. How prevalent are the problems of monopoly? There are two answers to this question. In one sense, monopolies are common. Most firms have some control over the prices they charge. They are not forced to charge the market price for the goods