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Review for Exam 1

Review for Exam 1. Chapters 1 Through 5. Learning Objective 2.1. Production Possibilities Frontiers and Opportunity Costs.

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Review for Exam 1

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  1. Review for Exam 1 Chapters 1 Through 5

  2. Learning Objective 2.1 Production Possibilities Frontiersand Opportunity Costs Production possibilities frontier (PPF) A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology. Opportunity cost The highest-valued alternative that must be given up to engage in an activity.

  3. Learning Objective 2.1 Production Possibilities Frontiersand Opportunity Costs Graphing the Production Possibilities Frontier FIGURE 2-1 BMW’s Production Possibilities Frontier

  4. Learning Objective 2.1 Production Possibilities Frontiersand Opportunity Costs Economic Growth FIGURE 2-3 Economic Growth Economic growth The ability of the economy to produce increasing quantities of goods and services.

  5. Learning Objective 2.2 Comparative Advantage and Trade Absolute Advantage versus Comparative Advantage Comparative advantage The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Absolute advantage The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

  6. Learning Objective 2.2 Comparative Advantage and Trade Trade The act of buying or selling. Specialization and Gains from Trade FIGURE 2-4 Production Possibilities for You and Your Neighbor, without Trade

  7. Learning Objective 2.2 Comparative Advantage and Trade Specialization and Gains from Trade TABLE 2-1 A Summary of the Gains from Trade

  8. Learning Objective 2.2 2-2 Solved Problem Comparative Advantage and theGains from Trade

  9. Learning Objective 2.3 The Market System The Legal Basis of a Successful Market System Protection of Private Property Property rights The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. Enforcement of Contracts and Property Rights If property rights are not well enforced, fewer goods and services will be produced. This reduces economic efficiency, leaving the economy inside its production possibilities frontier.

  10. Where Prices Come From: The Interaction of Demand and Supply • Perfectly competitive market A market in which there are many buyers and sellers, all the products are identical, and there are no barriers to new sellers entering the market. • Law of demand Holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

  11. Learning Objective 3.1 The Demand Side of the Market Holding Everything Else Constant:The Ceteris Paribus Condition FIGURE 3-2 Shifting the Demand Curve

  12. Learning Objective 3.1 The Demand Side of the Market Variables That Shift Market Demand TABLE 3-1 Variables That Shift Market Demand Curves

  13. Learning Objective 3.1 The Demand Side of the Market Variables That Shift Market Demand TABLE 3-1 Variables That Shift Market Demand Curves (continued)

  14. Learning Objective 3.2 The Supply Side of the Market The Law of Supply • Law of supply Holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

  15. Learning Objective 3.2 The Supply Side of the Market The Law of Supply FIGURE 3-5 Shifting the Supply Curve

  16. Learning Objective 3.2 The Supply Side of the Market Variables That Shift Supply TABLE 3-2 Variables That Shift Market Supply Curves

  17. Learning Objective 3.2 The Supply Side of the Market Variables That Shift Supply TABLE 3-2 Variables That Shift Market Supply Curves (continued)

  18. Learning Objective 3.3 Market Equilibrium: Putting Demand and Supply Together FIGURE 3-7 Market Equilibrium

  19. Learning Objective 3.4 The Effect of Demand and Supply Shifts on Equilibrium The Effect of Shifts in Supply on Equilibrium FIGURE 3-9 The Effect of an Increase in Supply on Equilibrium

  20. Learning Objective 3.4 The Effect of Demand and Supply Shifts on Equilibrium The Effect of Shifts in Demand on Equilibrium FIGURE 3-10 The Effect of an Increase in Demand on Equilibrium

  21. Learning Objective 4.1 Consumer Surplus and Producer Surplus Consumer surplusThe difference between the highest price a consumer is willing to pay and the price the consumer actually pays. Marginal benefitThe additional benefit to a consumer from consuming one more unit of a good or service. Producer surplus The difference between the lowest price a firm would have been willing to accept and the price it actually receives. Marginal cost The additional cost to a firm of producing one more unit of a good or service.

  22. Learning Objective 4.2 The Efficiency of Competitive Markets Economic Surplus Economic surplus The sum of consumer surplus and producer surplus. FIGURE 4-6 Economic Surplus Equals the Sum of Consumer Surplus and Producer Surplus

  23. Learning Objective 4.1 Consumer Surplus and Producer Surplus • What Consumer Surplus and Producer Surplus Measure Consumer surplus measures the net benefit to consumers from participating in a market rather than the total benefit. The net benefit equals the total benefit received by consumers minus the total amount they must pay to buy the good. Producer surplus measures the net benefit received by producers from participating in a market, or the total amount firms receive from consumers minus the cost of producing the good.

  24. Learning Objective 4.2 The Efficiency of Competitive Markets Deadweight Loss FIGURE 4-7 When a Market Is Not in Equilibrium There is a Deadweight Loss Deadweight loss The reduction in economic surplus resulting from a market not being in competitive equilibrium.

  25. Learning Objective 4.2 The Efficiency of Competitive Markets Economic Surplus and Economic Efficiency • Economic efficiency • A market outcome in which • the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and • the sum of consumer surplus and producer surplus is at a maximum.

  26. Learning Objective 4.3 Government Intervention in the Market:Price Floors And Price Ceilings Price Floors: Government Policy in Agricultural Markets FIGURE 4-8 The Economic Effect of a Price Floor in the Wheat Market

  27. Learning Objective 4.3 Government Intervention in the Market:Price Floors And Price Ceilings Price Ceilings: Government Rent Control Policy in Housing Markets FIGURE 4-9 The Economic Effect of a Rent Ceiling

  28. Learning Objective 4.4 The Economic Impact of Taxes The Effect of Taxes on Economic Efficiency FIGURE 4-10 The Effect of a Tax on the Market for Cigarettes

  29. Learning Objective 4.4 The Economic Impact of Taxes Tax Incidence: Who Actually Pays a Tax? Tax incidence The actual division of the burden of a tax between buyers and sellers in a market.

  30. Learning Objective 4.4 The Economic Impact of Taxes Tax Incidence: Who Actually Pays a Tax? Determining Tax Incidence on a Demand and Supply Graph FIGURE 4-11 The Incidence of a Tax on Gasoline

  31. Externalities, Environmental Policy, and Public Goods • Externality A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

  32. Learning Objective 5.1 Externalities and Economic Efficiency The Effect of Externalities • Private cost The cost borne by the producer of a good or service. • Social cost The total cost of producing a good, including both the private cost and any external cost. • Private benefit The benefit received by the consumer of a good or service. • Social benefit The total benefit from consuming a good or service, including both the private benefit and any external benefit.

  33. Learning Objective 5.1 Externalities and Economic Efficiency The Effect of Externalities How a Negative Externality in Production Reduces Economic Efficiency FIGURE 5-1 The Effect of Pollution on Economic Efficiency

  34. Learning Objective 5.1 Externalities and Economic Efficiency • How a Positive Externality in Consumption Reduces Economic Efficiency FIGURE 5-2 The Effect of a Positive Externality on Efficiency

  35. Learning Objective 5.1 Externalities and Economic Efficiency Externalities May Result in Market Failure Market failure A situation in which the market fails to produce the efficient level of output. What Causes Externalities? Property rights The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.

  36. Learning Objective 5.2 Private Solutions to Externalities: The Coase Theorem The Problem of Transactions Costs Transactions costs The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services. The Coase Theorem Coase theorem The argument of economist Ronald Coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities.

  37. Learning Objective 5.3 Government Policies to Deal with Externalities Pigovian taxes and subsidies Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities. Command and Control versus Tradable Emissions Allowances Command and control approach An approach that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.

  38. Learning Objective 5.3 Government Policies to Deal with Externalities FIGURE 5.5 When There Is a Negative Externality, a Tax Can Bring about the Efficient Level of Output

  39. Learning Objective 5.3 Government Policies to Deal with Externalities FIGURE 5.6 When There Is a Positive Externality, a Subsidy Can Bring about the Efficient Level of Output

  40. Learning Objective 5.3 Government Policies to Deal with Externalities Command and Control versus Tradable missions Allowances FIGURE 5.7 Estimated Cost of the Acid Rain Program in 2010

  41. Learning Objective 5.4 Four Categories of Goods FIGURE 5.8 Four Categories of Goods

  42. Learning Objective 5.4 Four Categories of Goods The Demand for a Public Good FIGURE 5.10 Constructing the Market Demand Curve for a Public Good

  43. Learning Objective 5.4 Four Categories of Goods The Optimal Quantity of a Public Good FIGURE 5.11 The Optimal Quantity of a Public Good

  44. Learning Objective 5.4 Four Categories of Goods Common Resources Tragedy of the commons The tendency for a common resource to be overused. FIGURE 5.12 Overuse of a Common Resource

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