Outline of Topics Chapter 1 How to graph slope of the line Calculating percent change What does marginal mean Percentage change Value in the second period Value in the first period Value in the first period Then multiplied by 100 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 competitors Specialization and gains from trade Trade The act of buying and selling Basis for trade is comparative advantage Chapter 3 Demand curves law of demand Demand 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 curve When the price of a product falls consumer buy a larger quantity because of the substitution effect and income effect Substitution 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 of a change in the good s price on consumers purchasing power Income effect The change in quantity demanded of a good that results from the effect Shift in demand Five 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 demanded A change in demand refers to a shift of the demand curve A 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 demanded Supply 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 equilibrium A market that is not in equilibrium moves towards equilibrium Market equilibrium A situation in which quantity demanded equals quantity supplied Once a market is in equilibrium it stays in equilibrium At 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 equilibrium Demand 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 increase If the supply curve shifts more than the demand curve than the equilibrium price will decrease Shift in supply Variables 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 price Producer 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 receives The total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price Economic surplus in a market is the sum of CS and PS When 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 equilibrium To achieve economy efficiency in market the marginal benefit from the last unit sold should equal the marginal cost of production Economic surplus is at a maximum when the market is in equilibrium Deadweight loss The reduction in economic surplus resulting from a market not being in equilibrium Economic 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 maximum Price 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 charge Price ceiling A legally determined maximum price that sellers may charge Reduces economic efficiency Black 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