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Production Possibilities Frontiersand Opportunity Costs
Learning Objective 2.1
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.
Production Possibilities Frontiersand Opportunity Costs
Learning Objective 2.1
Graphing the Production Possibilities Frontier
FIGURE 2-1
BMW’s Production Possibilities Frontier
Production Possibilities Frontiersand Opportunity Costs
Learning Objective 2.1
Economic GrowthFIGURE 2-3
Economic Growth
Economic growth The ability of the economy to produce increasing quantities of goods and services.
Learning Objective 2.2
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 versus Comparative Advantage
Comparative Advantage and Trade
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
Comparative Advantage and Trade
Learning Objective 2.2
Trade The act of buying or selling.
Specialization and Gains from Trade
FIGURE 2-4
Production Possibilities for You and Your Neighbor, without Trade
Learning Objective 2.2
Specialization and Gains from Trade
TABLE 2-1
A Summary of the Gains from Trade
Comparative Advantage and Trade
YOU YOUR NEIGHBOR
APPLES(IN POUNDS)
CHERRIES(IN POUNDS)
APPLES(IN POUNDS)
CHERRIES(IN POUNDS)
Production and consumption without trade 8 12 9 42
Production with trade 20 0 0 60
Consumption with trade 10 15 10 45
Gains from trade (increased consumption) 2 3 1 3
Learning Objective 2.2
Solved Problem 2-2Comparative Advantage and theGains from Trade
BEFORE TRADE AFTER TRADE
HONEY(IN TONS)
MAPLE SYRUP(IN TONS)
HONEY(IN TONS)
MAPLE SYRUP (IN TONS)
CANADA 30 15 30 20UNITED STATES 10 40 20 40
CANADA UNITED STATES
HONEY(IN TONS)
MAPLE SYRUP(IN TONS)
HONEY(IN TONS)
MAPLE SYRUP (IN TONS)
0 60 0 50
10 45 10 40
20 30 20 30
30 15 30 20
40 0 40 10
50 0
Learning Objective 2.3
Property rights The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
The Legal Basis of a Successful Market System
The Market System
Protection of Private Property
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.
–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.
Where Prices Come From: The Interaction of Demand and Supply
•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.
The Demand Side of the MarketLearning Objective 3.1
FIGURE 3-2
Shifting the Demand Curve
Holding Everything Else Constant:The Ceteris Paribus Condition
The Demand Side of the MarketLearning Objective 3.1
Variables That Shift Market Demand
TABLE 3-1
Variables That Shift Market Demand Curves
The Demand Side of the MarketLearning Objective 3.1
Variables That Shift Market Demand
TABLE 3-1
Variables That Shift Market Demand Curves (continued)
The Supply Side of the Market
•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.
Learning Objective 3.2
The Law of Supply
The Supply Side of the MarketLearning Objective 3.2
FIGURE 3-5
Shifting the Supply Curve
The Law of Supply
The Supply Side of the MarketLearning Objective 3.2
Variables That Shift Supply
TABLE 3-2
Variables That Shift Market Supply Curves
The Supply Side of the MarketLearning Objective 3.2
TABLE 3-2
Variables That Shift Market Supply Curves (continued)
Variables That Shift Supply
Market Equilibrium: Putting Demand and Supply Together
FIGURE 3-7
Market Equilibrium
Learning Objective 3.3
The Effect of Demand and Supply Shifts on Equilibrium
FIGURE 3-9
The Effect of an Increase in Supply on Equilibrium
The Effect of Shifts in Supply on Equilibrium
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
FIGURE 3-10
The Effect of an Increase in Demand on Equilibrium
The Effect of Shifts in Demand on Equilibrium
Learning Objective 3.4
Consumer surplus The difference between the highest price a consumer is willing to pay and the price the consumer actually pays.Marginal benefit The additional benefit to a consumer from consuming one more unit of a good or service.
Consumer Surplus and Producer Surplus
Learning Objective 4.1
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.
The Efficiency of Competitive Markets
FIGURE 4-6
Economic Surplus Equals the Sum of Consumer Surplus and Producer Surplus
Economic Surplus
Learning Objective 4.2
Economic surplus The sum of consumer surplus and producer surplus.
Learning Objective 4.1
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.
• What Consumer Surplus and Producer Surplus Measure
Consumer Surplus and Producer Surplus
The Efficiency of Competitive Markets
FIGURE 4-7
When a Market Is Not in Equilibrium There is a Deadweight Loss
Deadweight Loss
Deadweight loss The reduction in economic surplus resulting from a market not being in competitive equilibrium.
Learning Objective 4.2
The Efficiency of Competitive Markets
Economic efficiency
A market outcome in which
1)the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and
2)the sum of consumer surplus and producer surplus is at a maximum.
Economic Surplus and Economic Efficiency
Learning Objective 4.2
Government Intervention in the Market:Price Floors And Price Ceilings
FIGURE 4-8
The Economic Effect of a Price Floor in the Wheat Market
Price Floors: Government Policy in Agricultural Markets
Learning Objective 4.3
Government Intervention in the Market:Price Floors And Price Ceilings
FIGURE 4-9
The Economic Effect of a Rent Ceiling
Price Ceilings: Government Rent Control Policy in Housing Markets
Learning Objective 4.3
The Economic Impact of TaxesThe Effect of Taxes on Economic Efficiency
FIGURE 4-10
The Effect of a Tax on the Market for Cigarettes
Learning Objective 4.4
The Economic Impact of TaxesTax Incidence: Who Actually Pays a Tax?
Tax incidence
The actual division of the burden of a tax between buyers and sellers in a market.
Learning Objective 4.4
The Economic Impact of TaxesTax 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
Learning Objective 4.4
–Externality A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
Externalities, Environmental Policy, and Public Goods
Learning Objective 5.1
–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.
Externalities and Economic EfficiencyThe Effect of Externalities
Learning Objective 5.1
Externalities and Economic EfficiencyThe Effect of Externalities
FIGURE 5-1
The Effect of Pollution on Economic Efficiency
How a Negative Externality in Production Reduces Economic Efficiency
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
Learning Objective 5.1
Externalities and Economic EfficiencyExternalities 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.
Private Solutions to Externalities: The Coase Theorem
Learning Objective 5.2
The Coase Theorem
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 Problem of Transactions Costs
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.
Learning Objective 5.3
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.
Government Policies to Deal with Externalities
Government Policies to Deal with Externalities
Learning Objective 5.3
FIGURE 5.5
When There Is a Negative Externality, a Tax Can Bring about the Efficient Level of Output
Government Policies to Deal with Externalities
Learning Objective 5.3
FIGURE 5.6
When There Is a Positive Externality, a Subsidy Can Bring about the Efficient Level of Output
Learning Objective 5.3
Command and Control versus Tradable missions Allowances
FIGURE 5.7
Estimated Cost of the Acid Rain Program in 2010
Government Policies to Deal with Externalities
Learning Objective 5.4
FIGURE 5.10
Constructing the Market Demand Curve for a Public Good
Four Categories of GoodsThe Demand for a Public Good
Four Categories of Goods
Learning Objective 5.4
FIGURE 5.11
The Optimal Quantity of a Public Good
The Optimal Quantity of a Public Good