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ues involved in making strategic decisions. You should also keep in mind the importance of carefully assessing your opponent’s position and rational response to your actions, as Example 13.1 illustrates. 3Martin Shubik, Game Theory in the Social Sciences (Cambridge, MA: MIT Press, 1982). 490 PART 3 • Market Structure a... |
e firm. There is a market for a new “crispy” cereal and a 5Our discussion of the Nash equilibrium, and of game theory in general, is at an introductory level. For a more in-depth discussion of game theory and its applications, see James W. Friedman, Game Theory with Applications to Economics (New York: Oxford Universit... |
fess is both a Nash equilibrium and a maximin solution. Thus, in a very strong sense, it is rational for each prisoner to confess. *Mixed Strategies In all of the games that we have examined so far, we have considered strategies in which players make a specific choice or take a specific action: advertise or don’t adver... |
arging a high price) is then the rational response to a tit-for-tat strategy. (This assumes that my competitor knows, or can figure out, that I am using a tit-for-tat strategy.) To see why, suppose that in one month my competitor sets a low price and undercuts me. In that month he will make a large profit. But my compe... |
etitive Strategy $233 (based on a rate of 25 cents per mile for trips between 751 and 1000 miles). This proposal would have done away with the many different fares (some heavily discounted) then available. The cost of a ticket from one city to another would depend only on the number of miles between those cities. As a ... |
= 15, Firm 2 will set Q2 = 7.5, so that Firm 1 earns 112.50, and Firm 2 earns 56.25. Therefore, the most that Firm 1 can earn is 112.50, and it does so by setting Q1 = 15. Compared to the Cournot outcome, when Firm 1 moves first, it does better—and Firm 2 does much worse. 13.6 Threats, Commitments, and Credibility The ... |
intain a lower price and earn a higher profit. Similarly, Firm 2 has a cost advantage over Firm 1 in producing product B. If the two firms could agree about who will produce what, the rational outcome would be the one in the upper right-hand corner: Firm 1 produces A, Firm 2 produces B, and both firms make profits of 5... |
no gain in market share. Clearly this choice, shown in the lower right-hand corner of the matrix, would make no sense. If Firm X thinks you will be accommodating and maintain a high price after it has entered, it will find it profitable to enter and will do so. Suppose you threaten to expand output and wage a price wa... |
icy may provoke retaliation from its trading partners. If a trade war results, all countries can end up much worse off. The possibility of such an outcome must be considered before a nation adopts a strategic trade policy. E XAM PLE 13.5 DUPONT DETERS ENTRY IN THE TITANIUM DIOXIDE INDUSTRY Titanium dioxide is a whitene... |
lers will want an auction that minimizes the expected cost of the product. Auction Formats We will see that the choice of auction format can affect the seller’s auction revenue. Several different kinds of auction formats are widely used: 1. English (or oral) auction: The seller actively solicits progressively higher bi... |
To appreciate this possibility, suppose that there are actually 620 pennies in the jar. Let’s say the bidders’ estimates are 540, 590, 615, 650, and 690. Finally, suppose that you are the bidder whose estimate is 21To be more exact, the best strategy is to choose a bid that you believe will be equal to or slightly abov... |
inimum of $425 million) and generating just over $475 million for members of the class. EXAMPLE 13.8 INTERNET AUCTIONS The popularity of auctions has skyrocketed in recent years with the growth of the Internet. Indeed, the Internet has lowered transaction costs by so much that individuals anywhere in the world can now ... |
ise revenue and for a buyer to obtain an object at a reasonable price depends on the auction format, and on whether the items being auctioned have the same value to all bidders (as in a common-value auction) or different values to different bidders (as in a private-value auction). QUESTIONS FOR REVIEW 1. What is the di... |
ournot-Nash equilibrium. i. If Defendo adopts Technology A and Offendo enters the market, what will be the profit of each firm? Would Offendo choose to enter the market given these profits? ii. If Defendo adopts Technology B and Offendo enters the market, what will be the profit of each firm? Would Offendo choose to en... |
demand curve and must therefore lower the price of all units of the product in order to sell more of it. As a result, marginal revenue is always less than price (MR < P). This explains why the monopolistic curve lies below the competitive curve and why marginal revenue falls as output increases. Thus the marginal reven... |
But as the wage rate falls from $15 to $10 per hour, the product price also falls. Thus the firm’s demand curve shifts downward to MRPL2. As a result, the industry demand curve, shown in (b), is more inelastic than the demand curve that would be obtained if the product price were assumed to be unchanged. lead to more ... |
the firm would be forgoing an opportunity to make additional profit from clothing sales. If more than 50 yards were purchased, the cost of the fabric would be greater than the additional revenue from the sale of the extra clothing. The Market Supply of Inputs The market supply curve for a factor input is usually upward... |
uct of labor, MRPL) equal the benefit to consumers of the additional output, which is given by the price of the product times the marginal product of labor, (P)(MPL). When the output market is not perfectly competitive, the condition MRPL = (P)(MPL) no longer holds. Note in Figure 14.10 (b) that the curve representing ... |
t. In §10.5, we explain that marginal expenditure is the cost of one more unit, and average expenditure is the average price paid per unit. 20 Price (per unit of input) 15 wC w* 13 10 5 FIGURE 14.14 MARGINAL AND AVERAGE EXPENDITURE When the buyer of an input has monopsony power, the marginal expenditure curve lies abov... |
ave minimum wages above the Federal level. In April 1992 the New Jersey minimum wage was increased 6See Example 1.4 (page 15) for an initial discussion of the minimum wage, and Section 9.3 (page 328) for an analysis of its effects on employment. 7David Card and Alan Krueger, “Minimum Wages and Employment: A Case Study ... |
14.16 shows an adverse consequence of a union strategy directed toward raising union wages: Nonunionized wages fall. Unionization can improve working conditions and provide useful information to workers and management. But when the demand for labor is not perfectly inelastic, union workers are helped at the expense of ... |
oyer of workers. Which will hire more workers, and which will pay the higher wage? Explain. 5. Rock musicians sometimes earn several million dollars per year. Can you explain such large incomes in terms of economic rent? 6. What happens to the demand for one input when the use of a complementary input increases? 7. For... |
to account? How long should a timber company let trees grow before harvesting them for lumber? The answers to these investment and production decisions depend in part on the interest rate that one pays or receives when borrowing or lending money. We will discuss the factors that determine interest rates and explain why... |
rket Structure and Competitive Strategy TABLE 15.4 CALCULATING LOST WAGES YEAR 1996 1997 1998 1999 2000 2001 2002 2003 W0(1 + g)t (1 – mt) 1/(1 + R)t W0(1 + g)t (1 – mt)/(1 + R)t $ 85,000 91,800 99,144 107,076 115,642 124,893 134,884 145,675 .991 .990 .989 .988 .987 .986 .985 .984 1.000 $84,235 .917 .842 .772 .708 .650... |
od of default is very low. How does one determine the effective yield (i.e., rate of return, or yield to maturity) on this bond? For simplicity, we’ll assume that the coupon payments are made annually instead of every six months. (The error that this introduces is small.) Because the Microsoft bond matures in 2041, cou... |
st rate on government bonds. The nominal interest rate (9 percent) is the rate that we see in the newspapers; it includes inflation. The real interest rate is the nominal rate minus the expected rate of inflation.11 If we expect inflation to be 5 percent per year on average, the real interest rate would be 9 - 5 = 4 pe... |
In that case, your investment would be completely diversified and you would bear no diversifiable risk. You would, however, bear nondiversifiable risk because the stock market tends to move with the overall economy. (The stock market reflects expected future profits, which depend in part on the economy.) As a result, t... |
e firm’s investment problem. Let’s do this for a consumer’s decision to buy a car. The main benefit from owning a car is the flow of transportation services it provides. The value of those services differs from consumer to consumer. Let’s assume our consumer values the service at S dollars per year. Let’s also assume t... |
United States, entry into college has become attainable for the majority of graduating high school seniors.17 In other words, a college education is an investment with close to free entry. As we saw in Chapter 8, in markets with free entry, we should expect to see zero economic profits, which implies that investments w... |
+ R)(Pt - c) = (1 + R)(Pt - c), keep the oil in the ground. - c), sell all the oil now. - c), makes no difference. Given our expectation about the growth rate of oil prices, we can use this rule to determine production. But how fast should we expect the market price of oil to rise? The Behavior of Market Price Suppose ... |
e interest rate. In Figure 15.5, it is the curve labeled DH. The second source of demand for loanable funds is firms that want to make capital investments. Remember that firms will invest in projects with NPVs that are positive because a positive NPV means that the expected return on the project exceeds the opportunity... |
ould be used to calculate NPV? 5. You are retiring from your job and are given two options: You can accept a lump sum payment from the company, or you can accept a smaller annual payment that will continue for as long as you live. How would you decide which option is best? What information do you need? 6. You have noti... |
the outcomes generated by an economy are equitable. To the extent that these outcomes are deemed inequitable, government can help redistribute income. We then go on to describe the conditions that an economy must satisfy if it is to produce and distribute goods efficiently. We explain why a perfectly competitive market... |
. Recall from §2.1 that two goods are complements if an increase in the price of one leads to a decrease in the quantity demanded of the other. E XAM PLE 16.1 THE GLOBAL MARKET FOR ETHANOL High crude oil prices, harmful emissions, and growing dependency on volatile foreign oil supplies have led to a growing interest in... |
each other. Moreover, there are important equity implications that flow from the workings of competitive markets in general equilibrium, and we need to consider those equity issues. To avoid losing many of our readers along the way, our strategy is to build the theoretical analysis slowly and step by step. 602 PART 4 •... |
clothing for food is equal to 1/2, while Karen’s is 3. The shaded area between these two indifference curves represents all possible allocations of 1 and U K CHAPTER 16 • General Equilibrium and Economic Efficiency 605 Karen’s Food OK D C B 3 UK 2 UK UK Karen’s Clothing 6C 10F 10F 6C James’s Clothing OJ James’s Food FI... |
d in some markets (the quantity demanded of one good is greater than the quantity supplied) and excess supply in others (the quantity supplied is greater than the quantity demanded). In our example, each Karen’s quantity demanded for food is greater than each James’s willingness to sell it, whereas each Karen’s willing... |
vidual endowments will be. Rawls argues that, faced with a world in which you do not know your own “fate,” you would opt for a system ensuring that the least well-off person in society will be treated reasonably well. Specifically, according to Rawls, the most equitable allocation maximizes the utility of the least-wel... |
describe this, we define the marginal rate of transformation of food for clothing (MRT) as the magnitude of the slope of the frontier at • production possibilities frontier Curve showing the combinations of two goods that can be produced with fixed quantities of inputs. Recall from §14.4 that a rent- maximizing union a... |
rket is efficient. Any other price ratio will lead to an excess demand for one good and an excess supply of the other. 618 PART 4 • Information, Market Failure, and the Role of Government 1/PC 1 , producers will not produce the combination of food and clothing ratio PF at B. Because the producer wants to produce F1 uni... |
location. This is true not only for the iPod as a whole, but also for its major components. This “unbundling” of production, which allows firms to use different countries’ comparative advantages in different steps of production, has been made possible by better communications technology and a decline in shipping costs.... |
s efficiency requires that goods be produced in combinations and at costs that match people’s willingness to pay for them. 16.7 Why Markets Fail We can give two different interpretations of the conditions required for efficiency. The first stresses that competitive markets work. It also tells us that we ought to ensure... |
ons lie on the exchange contract curve and are Pareto efficient. 4. The utility possibilities frontier measures all efficient allocations in terms of the levels of utility that each of two people achieves. Although both individuals prefer some allocations to an inefficient allocation, not every efficient allocation mus... |
relevant for the choices they face. Now we will see what happens when some parties know more than others—i.e., when there is asymmetric information. Asymmetric information is quite common. Frequently, a seller of a product knows more about its quality than the buyer does. Workers usually know their own skills and abil... |
DVERSE SELECTION Our used car scenario is a simplified illustration of an important problem that affects many markets—the problem of adverse selection. Adverse selection arises when products of different qualities are sold at a single price because buyers or sellers are not sufficiently informed to determine the true q... |
re needs in the future than insurance companies can possibly know. Now think about who will choose to buy the insurance and who will choose to forgo the $5,000 annual expense. Those seniors who have chronic diseases or for other reasons expect their health care costs to exceed $5,000 are much more likely to buy the ins... |
oduct. Group I people would be paid $10,000 per year, Group II people $20,000. On the other hand, if firms could not 5This is essentially the model developed in Spence, Market Signaling. 640 PART 4 • Information, Market Failure, and the Role of Government identify productivity before they hired people, they would pay a... |
sultants, investment bankers, and computer programmers regularly work into the night and on weekends, putting in 60- or 70-hour weeks. Is it surprising that these people are working so hard? Not at all. They are trying to send signals that can greatly affect their careers. Employers rely increasingly on the signaling v... |
does. The agent is the person who acts, and the principal is the party whom the action affects. A principal– agent problem arises when agents pursue their own goals rather than the goals of the principal. In our example, the manager and the workers are the agents, and the owners of the firm are the principals. In this... |
in Public Enterprises The principal–agent framework can also help us understand the behavior of the managers of public organizations. These managers may also be interested in power and perks, both of which can be obtained by expanding their organization beyond its “efficient” level. Because it is also costly to monitor... |
enuesharing arrangement. When revenues are greater than $18,000, w = R - $18,000 (17.2) (Otherwise the wage is zero.) In this case, if the repairperson makes a low effort, he receives an expected payment of $1000. But if he makes a high level of effort, his expected payment is $12,000, and his expected payment less the... |
ly seeking work. Many of the unemployed would presumably work for an even lower wage rate than that being received by employed people. Why don’t we see firms cutting wage rates, increasing employment levels, and thereby increasing profit? Can our models of competitive equilibrium explain persistent unemployment? In thi... |
mpetitive? 2. If the used car market is a “lemons” market, how would you expect the repair record of used cars that are sold to compare with the repair record of those not sold? 3. Explain the difference between adverse selection and moral hazard in insurance markets. Can one exist without the other? 4. Describe severa... |
, if any, should firms be allowed to dump into rivers and streams? How strict should automobile emission standards be? How much money should the government spend on national defense? Education? Basic research? Public television? When externalities are present, the price of a good need not reflect its social value. As a... |
try. Positive Externalities and Inefficiency Externalities can also result in too little production, as the example of home repair and landscaping shows. In Figure 18.2, the horizontal axis measures the home owner’s investment (in dollars) in repairs and landscaping. The marginal cost curve for home repair shows the co... |
and marginal social cost interchangeably in the discussion that follows. (Recall that we have assumed that the firm’s output is fixed, so that the private costs of production—as opposed to pollution abatement—are unchanged.) The MEC curve slopes upward because the marginal cost of the externality gets higher as the ex... |
e first 6 units of reduction, but it will also be cheaper to reduce emissions by 2 more units: The emissions fee is greater than the marginal abatement cost for emissions levels between 6 and 8. THE CASE FOR STANDARDS Now let’s examine the case for standards by looking at Figure 18.7. While the marginal external cost c... |
t half of the 1990s.8 An effective emissions trading system could reduce those costs substantially in the decades to come. The Environmental Protection Agency’s “bubble” and “offset” programs were modest attempts to use a trading system to lower cleanup costs. A bubble allows an individual firm to adjust its pollution ... |
osal fee is difficult to implement because it would be very costly for a community to sort through trash to separate and then to collect glass materials. Pricing and billing for scrap disposal would also be expensive, because the weight and composition of materials would affect the social cost of the scrap and, therefo... |
lps the firm decide whether to invest in a new factory, equipment, or other capital. By comparing the present discounted value (PDV) of the additional profits likely to result from the investment to the cost of the investment, i.e., by calculating the investment’s net present value (NPV), the firm can decide whether or... |
but yields benefits only 50 or 100 years in the future (e.g., a policy to deal with global warming). Not so, however, if the discount rate is only 1 or 2 percent.15 Thus for problems involving long time horizons, the policy debate often boils down to a debate over the correct discount rate. E XAM PLE 18.5 GLOBAL WARMI... |
ces the fishermen’s profit. As Table 18.4 shows, the factory can install a filter system to reduce its effluent, or the fishermen can pay for the installation of a water treatment plant.19 The efficient solution maximizes the joint profit of the factory and the fishermen. Maximization occurs when the factory installs a... |
agram includes not only the private operating costs but also the social cost of depleting the stock of fish. Now compare the efficient outcome with what happens when the lake is common property. In this case, the marginal external costs are not taken into account, and each fisherman fishes until there is no longer any ... |
providing education to one more child. Likewise, charging tuition can exclude some children from enjoying education. Public education is provided by local government because it entails positive externalities, not because it is a public good. Finally, consider the management of a national park. Part of the public can b... |
for determining private preferences for government-produced goods. Voting is commonly used to decide allocation questions. For example, people vote directly on some local budget issues and elect legislators who vote on others. Many state and local referenda are based on majority-rule voting: Each person has one vote, ... |
r personal computers and that exposure to a wide variety of computer programs will inspire young programmers to create even more innovative programs. Considering the marginal social benefits possibly gained by this proposal, do you agree with this position? 3. Assume that scientific studies provide you with the followi... |
consumers’ tastes, etc.). Data are available for Y and the Xs, but the error term is assumed to be unobservable. Note that equation (A.1) must be linear in the parameters, but it need not be linear in the variables. For example, if equation (A.1) represented a demand function, Y might be the logarithm of quantity (log ... |
NDIX • The Basics of Regression • standard error of the regression Estimate of the standard deviation of the regression error. • R-squared (R2) Percentage of the variation in the dependent variable that is accounted for by all the explanatory variables. Note that the income and interest rate variables are also signific... |
statistical procedure for quantifying economic relationships and testing hypotheses about them. 2. The linear regression model, which relates one dependent variable to one or more independent variables, is usually estimated by choosing the intercept and slope parameters that minimize the sum of the squared residuals b... |
. discount rate (page 569) Rate used to determine the value today of a dollar received in the future. diseconomies of scale (page 256) Situation in which a doubling of output requires more than a doubling of cost. diseconomies of scope (page 259) Situation in which joint output of a single firm is less than could be ac... |
ces chosen in a base year divided by the cost of purchasing the same bundle at base-year prices. law of diminishing marginal returns (page 209) Principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease. law of small numbers (page 195) Tendency to... |
ariables having a tendency to move in the same direction. predatory pricing (page 390) Practice of pricing to drive current competitors out of business and to discourage new entrants in a market so that a firm can enjoy higher future profits. present discounted value (PDV) (page 561) The current value of an expected fu... |
strategy in which a player responds in kind to an opponent’s previous play, cooperating with cooperative opponents and retaliating against uncooperative ones. total cost (TC or C) (page 233) Total economic cost of production, consisting of fixed and variable costs. transfer prices (page 439) Internal prices at which pa... |
. Although we know the responsiveness of demand to change in price, we need to know the quantities and the prices of the products to determine total sales revenues. 11. a. With small changes in price, the point elasticity formula would be appropriate. But here, the price of food increases from $2 to $2.50, so arc elas=... |
- 1 is paid by the firm. The labor demand becomes LD* = 80 - 10(w - 1). So w = $4.50 and L = 45. 4. a. Equating demand and supply, 28 - 2P = 4 + # 4P P* = 4 and Q* = 20. b. The 25-percent reduction would imply that farmers produce 15 billion bushels. To encourage farmers to withdraw their land from cultivation, the go... |
of demand for Alcoa’s primary aluminum is much higher than we would expect. In many applications, other metals, such as copper and steel, are feasible substitutes for aluminum. Here, the demand elasticity Alcoa faces may be lower than we would otherwise expect. b. Con: The stock of potential supply is limited. Therefor... |
n there is a competitive market for engines. Given the high cost of engines, the firm does best when engines are produced at the lowest cost with an external, competitive market for engines. CHAPTER 12 ANSWERS TO SELECTED EXERCISES • 727 several brands with different prices and characteristics is one method of splittin... |
he NPV. The necessary condition is dNPV/dt = e -0.1t (50 - t -0.5) - 0.1e -0.1t · 100t0.5 = 0. Solving, t = 5. If we hold the bottle 5 years, the NPV is -100 + e -0.1·5100 · 50.5 = 35.62. Since each bottle is a good investment, we should buy all 100 bottles. b. You are offered $130 for resale, so you would make an imme... |
game, 491 Advertising-to-sales ratio, 431 Agency relationships, 645–651 Aggregate demand, 128–129 Agostini, Claudio, 51n15 Airbus, 513–514 Airline/aircraft industries competition and collusion in, 501–502 jet fuel demand and, 536–537 learning curves and, 265 price discrimination and fares, 409–410 regulation and, 330–... |
eratives, 283–284 Cooter, Robert, 685n19 Cootner, Paul H., 46n12 Copper price of, 29–30, 52–54 short-run world supply of, 297–298 supply and demand for, 53 supply of, 45–46 Copyrights, 376 Corner solutions, 89–90 Corporate bonds versus prime rate, 475 rates and, 590 yields on, 567–569 Corporate takeovers, 646 Corts, Ke... |
world food production per capita, 213 Ford, Henry, 656 Ford Motor Company, 17, 77–78, 88, 310, 389, 457, 656 Formby, John P., 130n5 Fox, Merritt B., 646n9 Framing, 191 Frech, H. E., III, 98n12 Free entry and exit, perfect competition and, 280–281 Free riders, 693 Free trade, 618–623 comparative advantage and, 618–619 e... |
ansion path, 253 Long-run marginal cost curve, 254–255 Long-run producer surplus, 305–306 Long-run production, 205 Long-run profit maximization, 300–301 Long-run supply, 306–314 constant-cost industries and, 307–308 decreasing-cost industries and, 310 elasticity and, 311–312 increasing-cost industries and, 308–309 tax ... |
382 Price changes budget constraints and, 84–86 individual demand and, 112 Price competition, 465 Bertrand model and, 464–465 choosing prices and, 466–467 with differentiated products, 465–467 with homogeneous products, 465–467 Price-consumption curve, 112 Price controls, 58–60, 319–323 Price discrimination, 401–410. ... |
ecurity system solvency, 105 Social welfare functions, 611–612 Soft drinks, elasticities of demand for, 370 Software, production costs of, 235–236 Sönmez, Tayfun, 327n4 Sotheby’s auction house, 521, 522 Specific taxes, effects of, 345–348 Speculative demand, 129 Spence, Michael, 638n4 Sprint, 417–419 Stackelberg equili... |
Pass Go. 393 15.2 The Yields on Corporate Bonds 567 10.8 The United States and the European Union versus 15.3 The Value of a New York City Taxi Medallion 573 Microsoft 394 15.4 Capital Investment in the Disposable Diaper 11.1 The Economics of Coupons and Rebates 408 Industry 576 11.2 Airline Fares 409 15.5 Choosing an... |
o live? Does everyone have access to healthcare? In every country in the world, there are people who are hungry, homeless (for example, those who call park benches their beds, as Figure 1.2 shows), and in need of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because of scar... |
r political candidates talking about economics, you will be able to distinguish between common sense and nonsense. You will find new ways of thinking about current events and about personal and business decisions, as well as current events and politics. The study of economics does not dictate the answers, but it can il... |
ny different types of labor. The circular flow diagram simplifies this to make the picture easier to grasp. In the diagram, firms produce goods and services, which they sell to households in return for revenues. The outer circle shows this, and represents the two sides of the product market (for example, the market for... |
.9 Globalization Cargo ships are one mode of transportation for shipping goods in the global economy. (Credit: Raul Valdez/Flickr Creative Commons) The Rise of Globalization Recent decades have seen a trend toward globalization, which is the expanding cultural, political, and economic connections between people around ... |
roeconomic perspective looks at the economy as a whole, focusing on goals like growth in the standard of living, unemployment, and inflation. Macroeconomics has two types of policies for pursuing these goals: monetary policy and fiscal policy. 1.3 How Economists Use Theories and Models to Understand Economic Issues Eco... |
o bus tickets and five burgers). Alternatively, if Alphonso spends all his money on bus tickets, he can afford 20 per week. ($10 per week/$0.50 per bus ticket = 20 bus tickets per week.) Then, however, he will not be able to afford any burgers. Point F shows this alternative choice (20 bus tickets and zero burgers). If... |
ishing Marginal Utility The budget constraint framework helps to emphasize that most choices in the real world are not about getting all of one thing or all of another; that is, they are not about choosing either the point at one end of the budget constraint or else the point all the way at the other end. Instead, most... |
ecause its slope is given by the relative prices of the two goods, which from the point of view of an individual consumer, are fixed, so the slope doesn't change. In contrast, the PPF has a curved shape because of the law of the diminishing returns. Thus, the slope is different at various points on the PPF. The second ... |
years (e.g., more labor and more capital), the economy grows. As it does, the production possibilities frontier for a society will tend to shift outward and society will be able to afford more of all goods. This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 Chapter 2 | Choice in a World of ... |
thing from it except the pleasure of seeing it.” Clearly, individuals are both self-interested and altruistic. Second, we can label self-interested behavior and profit-seeking with other names, such as personal choice and freedom. The ability to make personal choices about buying, working, and saving is an important pe... |
ore. Individuals face the tradeoff of what quantities of goods and services to consume. The budget constraint, which is the frontier of the opportunity set, illustrates the range of available choices. The relative price of the choices determines the slope of the budget constraint. Choices beyond the budget constraint a... |
turns out, the price of gasoline in June of any given year is nearly always higher than the price in January of that same year. Over recent decades, gasoline prices in midsummer have averaged about 10 cents per gallon more than their midwinter low. The likely reason is that people drive more in the summer, and are als... |
curve (S) intersect at the equilibrium point E, with a price of $1.40 and a quantity of 600. The equilibrium is the only price where quantity demanded is equal to quantity supplied. At a price above equilibrium like $1.80, quantity supplied exceeds the quantity demanded, so there is excess supply. At a price below equi... |
would decrease to 17 million, at point R. The original demand curve D0, like every demand curve, is based on the ceteris paribus assumption that no other economically relevant factors change. Now imagine that the economy expands in a way that raises the incomes of many people, making cars more affordable. How will thi... |
Before discussing how changes in demand can affect equilibrium price and quantity, we first need to discuss shifts in supply curves. How Production Costs Affect Supply A supply curve shows how quantity supplied will change as the price rises and falls, assuming ceteris paribus so that no other economically relevant fa... |
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