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ay introduce additional barriers to entry. Search costs may prevent consumers from ﬁnding new entrants with lower Chapter 15: Imperfect Competition 563 prices and/or higher quality than existing ﬁrms. Product differentiation may raise entry barriers because of strong brand loyalty. Existing ﬁrms may bolster brand loyal...
provide better incentives for innovation? Which is more innovative, a large or a small ﬁrm? An established ﬁrm or an entrant? Answers to these questions can help inform policy toward mergers, entry regulation, and small-ﬁrm subsidies. As we will see with the aid of some simple models, there is no deﬁnite answer as to w...
ferentiation, search costs, collusion) will increase ﬁrms’ proﬁt, but an offsetting effect in the long run is that entry—which tends to reduce oligopoly proﬁt—will be more attractive. • Innovation may be even more important than low prices for total welfare in the long run. Determining which oligopoly structure is the ...
ng rival, whereas those located nearer the middle will have two. To avoid this problem, Steven Salop introduced competition on a circle.18 As in the Hotelling model, demanders are located at each point, and each demands one unit of the good. A consumer’s surplus equals v (the value of consuming the good) minus the pric...
er actions are strategic substitutes or complements by drawing inferences directly from the proﬁt function. Substituting Equation iii into the ﬁrst-order condition of Equation i gives p1 BR1ð 1ð a2Þ , a2Þ ¼ 0: (iv) Totally differentiating Equation iv with respect to a2 yields, after dropping the arguments of the functi...
to a premium) to past customers if the ﬁrm lowers its 576 Part 6: Market Power TABLE 15.1 STRATEGIC EFFECT WHEN ACCOMMODATING ENTRY ‘‘Tough’’ (dp2 "/dK1 < 0) ‘‘Soft’’ (dp2 "/dK1 > 0) Firm 1’s Investment Actions Strategic Complements (BR 0 > 0) Strategic Substitutes (BR 0 < 0) Underinvest ( Overinvest ( ) Overinvest ( ...
has an important interpretation. Any person has a ‘‘full income’’ given by 24w. That is, an individual who worked all the time would have this much command over real consumption goods each day. Individuals may spend their full income either by working (for real income and consumption) or by not working and thereby enjo...
ach, this function should be interpreted as a ‘‘compensated’’ (constant utility) labor supply function, which we will denote by lc(w, U ) to avoid confusing it with the uncompensated labor supply function l(w, n) introduced earlier. Slutsky equation of labor supply Now we can use these concepts to derive a Slutsky-type...
ing equilibria have been blamed on ‘‘sticky’’ real wages, inaccurate expectations by workers or ﬁrms about the price level, the impact of government unemployment insurance programs, labor market regulations and minimum wages, and intertemporal work decisions by workers. We will encounter a few of these applications lat...
intended to augment a person’s ‘‘health capital’’ (which is one component of human capital). There is ample evidence that such capital pays off in 7For simplicity we do not discount future proﬁts here. Chapter 16: Labor Markets 593 terms of increased productivity; indeed, ﬁrms themselves may wish to invest in such capi...
uyer) in the labor market. If there is only one buyer in the labor market, then this ﬁrm faces the entire market supply curve. To increase its hiring of labor by one more unit, it must move to a higher point on this supply curve. This will involve paying not only a higher wage to the ‘‘marginal worker’’ but also additi...
ce in setting union goals and how union goals may affect the desires of workers with differing amounts of seniority on the job. 13Mathematically, the union’s goal is to choose l so as to maximize wl – (area under S), where S is the compensated supply curve for labor and reﬂects workers’ opportunity costs in terms of fo...
What will be the equilibrium levels for w and l in this market? b. Suppose the government wishes to increase the equilibrium wage to $4 per hour by offering a subsidy to employers for each person hired. How much will this subsidy have to be? What will the new equilibrium level of employment be? How much total subsidy w...
unt utility in the second period and that the real interest rate between the two periods is zero. Discounting in a multiperiod context is taken up in Chapter 17. The discussion in that chapter also generalizes the approach to studying changes in the Lagrange multiplier over time shown in part (c). This page intentional...
! þ r : Þ ¼ ð (17:8) (17:9) (17:10) In words, wealth that is not currently consumed ð return, r, and will grow to yield c$1 in the next period. W c$0Þ ! is invested at the rate of EXAMPLE 17.1 Intertemporal Impatience Individuals’ utility-maximizing choices over time will obviously depend on how they feel about the re...
resent and future consumption consists of the same homogeneous good, this will also determine the equilibrium rate of return according to the relationship p$1Þ ð p$1 ¼ 1 1 þ r$ or r$ 1 p$1 : ! p$1 ¼ (17:19) 0:95, then r$ Because p$1 will be less than 1, this equilibrium rate of return will be positive. For exam0:05, an...
f machine-hours, this is usually taken to mean that the ﬁrm desires a certain number of machines. The ﬁrm’s demand for capital services is also a demand for capital.7 A proﬁt-maximizing ﬁrm in perfect competition will choose its level of inputs so that the marginal revenue product from an extra unit of any input is equ...
criterion, consider the case of a forester who must decide when to cut down a growing tree. Suppose the value of the tree at any time, t, is given by f (t) where f 0ð and that l dollars were invested initially as payments to workers t ð who planted the tree. Assume also that the (continuous) market interest rate is gi...
roportional to marginal utility, it seems plausible that the price trends calculated here might be consistent with optimal consumption. But a more complete analysis would need to introduce the consumer’s rate of time preference and his or her willingness to substitute for an increasingly high-priced resource, so there ...
purchases. c0). ! c. Suppose the tax authorities wish to impose an ‘‘income’’ tax based on the value of capital gains. If all such gains are valued in terms of c0 as they are ‘‘accrued,’’ show how those gains should be measured. Call this value G1. d. Suppose instead that capital gains are measured as they are ‘‘realiz...
Þ 1 ð n : (17A:1) The PDV is the amount an individual would be willing to pay in return for a promise to receive the stream N0, N1, N2, … , Nn. It represents the amount that would have to be invested now if one wished to duplicate the payment stream. Annuities and perpetuities An annuity is a promise to pay $N in each ...
me efﬁciency losses must be considered. Externalities are the principal topic of Chapter 19. The ﬁrst part of the chapter is concerned with situations in which the actions of one economic actor directly affect the well-being of another actor. We show that, unless these costs or beneﬁts can be internalized into the deci...
t knowledge Preparation, patience Value for good Care to avoid breakage Health insurer Insurance purchaser Preexisting condition Parent Child Moral ﬁber Risky activity Delinquency 644 Part 8: Market Failure outcome is called the second-best contract. Adding further constraints to the principal’s problem besides the inf...
ensuring the agent’s participation in the contract. The owner optimally pays the lowest salary satisfying Equation 18.5: s’ ¼ owner’s net proﬁt then is c(e’). The e’Þ c pnÞ ¼ ð ð which is maximized for e’ satisfying the ﬁrst-order condition s’Þ ¼ e’ $ e’ $ E E ð , e’Þ ¼ ð At an optimum, the marginal cost of effort, c0(...
enough to pay a ﬁxed unit price for this input as a ﬁrm would the rental rate for capital or the market price for materials. How productive the manager is depends on how his compensation is structured. The same can be said for any sort of labor input: workers may shirk on the job unless monitored or given incentives n...
ayment after theft from the full $20,000 down to $3,374 and lowers the premium to $602. (These second-best contractual terms were computed by the authors using numerical methods; we will forgo the complicated computations and just take these terms as given.) Let’s check that the individual would indeed want to install ...
of the good to less but that the marginal beneﬁt of more units is decreasing. The consumer’s type is given by y, which can be high (yH) with probability b and low (yL) with probability 1 b. The high type enjoys consuming the good more than the low type: 0 < yL < yH. The total tariff T paid by the consumer for the bund...
ey accept the contract rather than forgoing the monopolist’s good. The last two are incentive compatibility constraints, ensuring that each type chooses the bundle targeted to him rather than the other type’s bundle. As suggested by the graphical analysis in Figure 18.6, only two of these constraints play a role in the...
ough E is ﬂatter than the low type’s. To see this, note that expected utility equals (1 pU(W2) and so the MRS is given by p)U(W1) dW1 dW2 ¼ 1 ð $ U 0ð p $ Þ W2Þ pU 0ð $ W1Þ : þ At a given (W1, W2) combination on the graph, the marginal rates of substitution differ only because the underlying probabilities of loss diffe...
5,000 ð 453 and xL ¼ : Þ 3,020. (18:63) 670 Part 8: Market Failure Market Signaling In all the models studied so far, the uninformed principal moved ﬁrst—making a contract offer to the agent, who had private information. If the information structure is reversed and the informed player moves ﬁrst, then the analysis beco...
ecret bids. The auctioneer unseals the bids and awards the object to the highest bidder, who pays his or her bid. In equilibrium, it is a weakly dominated strategy to submit a bid b greater than or equal to the buyer’s valuation v Weakly dominated strategy. A strategy is weakly dominated if there is another strategy th...
speciﬁc issues. • Asymmetric information is often studied using a principal-agent model in which a principal offers a contract to an agent who has private information. The two main variants of the principal-agent model are the models of hidden actions and of hidden types. • • In a hidden-action model (called a moral ha...
s problem will illustrate.11 Suppose n partners together produce a revenue of R en; here ei is partner i’s effort, which costs him c e2 i =2 to exert. e1 þ + + + þ ¼ a. Compute the equilibrium effort and surplus (revenue minus effort cost) if each partner receives an equal share of the revenue. b. Compute the equilibri...
as measured by l(yH) is 0]. Substituting into Equation x and rearranging yields uv 0 q ð u ÞÞ : ÞÞ (xiv) ¼ This equation tells us a lot about the second best. Because F(yH) 1, for the highest type the equation reduces to yHv 0(q(yH)) c, the ﬁrst-best condition. We again have ‘‘no distortion at the top’’ for the high t...
13, national defense provides the traditional example. Once a defense system is established, all individuals in society are protected by it whether they wish to be or not and whether they pay for it or not. Choosing the right level of output for such a good can be a tricky process, because market signals will be inaccu...
all social marginal costs (MC 0)—the vertical distance between the two curves represents the costs that x FIGURE 19.1 Graphic Analysis of an Externality The demand curve for good x is given by DD. The supply curve for x represents the private marginal costs (MC) involved in x production. If x production imposes externa...
rom the beneﬁts of consuming the good. For most private goods such exclusion is indeed possible: I can easily be excluded from consuming a hamburger if I don’t pay for it. In some cases, however, such exclusion is either very costly or impossible. National defense is the standard example. Once a defense system is estab...
ay. Hence, for public goods, the demand curve must be derived by a vertical summation rather than the horizontal summation used in the case of private goods. Price D1 + D2 + D3 = D 3 2 1 3 2 D D3 D2 D1 Quantity per period demand curve will then reﬂect, for any level of output, how much an extra unit of output would be ...
n of the Nash equilibrium for public goods production and in our roommates’ example that the incentive to be a free rider in the public goods case is very strong. This fact makes it difﬁcult to envision how the information necessary to compute equilibrium 702 Part 8: Market Failure Lindahl shares might be obtained. Bec...
n 1948.12 Black showed that equilibrium voting outcomes always occur in cases where the issue being voted upon is one-dimensional (such as how much to spend on a public good) and where voters’ preferences are ‘‘single peaked.’’ To understand what the notion of single peaked means, consider again Condorcet’s paradox. In...
couraging people to reveal their demands for a public good.17 To illustrate this mechanism, suppose that there are n individuals in a group and each has a private (and unobservable) net valuation vi for a proposed taxation–expenditure project. In seeking information about these valuations, the government states that, s...
nalyze whether an optimal tax on the polluter would necessarily be a welfare improvement. 19.6 Suppose there are only two individuals in society. Person A’s demand curve for mosquito control is given by for person B, the demand curve for mosquito control is given by qn ¼ 100 p; ’ qb ¼ 200 p: ’ a. Suppose mosquito contr...
mission by-products, eA and eB. The physical amounts of these emissions (or at least their harmful components) can be abated using inputs zA and zB (which cost p per unit). The resulting levels of emissions are given by f A qA, zAÞ ¼ ð eA and f B qB, zBÞ ¼ ð eB, (i) where, for each ﬁrm’s abatement function, f1 > 0 and ...
he mean. However, unlike the Normal, the entire uniform distribution is within two standard deviations of the mean because that distribution does not have long tails. $ CHAPTER 3 3.1 The derivation here holds utility constant to create an implicit relationship between y and x. Changes in x also implicitly change y beca...
w 10.4 In this case s 4v, cost minimization could use the inputs in any combination (for q constant) without changing costs. A rise in w would cause the ﬁrm to switch to using only capital and would not affect total costs. This shows that the impact on costs of an increase in the price of a single input depends import...
rs. Only the supply-demand equilibrium (l 11.67) satisﬁes both these ¼ curves. Whether this is indeed a Nash equilibrium depends, among other things, on whether the union deﬁnes its payoffs as being accurately reﬂected by the labor supply curve. 583, w ¼ 16.6 If the ﬁrm is risk neutral, workers risk averse, optimal con...
xtra $1. 10, b 4, b ¼ ¼ 3, and U 1, and U 127. 79. ¼ ¼ 4.5 b. g c. Utility d. E ¼ ¼ I/(pg þ m ¼ ¼ m(2pg þ pv/2); v v ¼ pv). pv). I/(2pg þ pv). ¼ I/(2pg þ 4.7 a. See detailed solutions. b. Requires expenditure of 12. c. Subsidy is 5/9 per unit. Total cost of subsidy is 5. d. Expenditures to reach U 2 are 9.71. To reach ...
la’s ability to inﬂuence the decision depends on whether she can impose any costs on the bar if she is unhappy serving the additional tables. Such ability depends on whether Carla is a draw for Cheers’ customers. 10,000. ¼ ¼ ¼ 9.5 Let A bkalb 1 > 0, # a. 1 for simplicity. ¼ aka 1lb > 0, fl ¼ fk ¼ # 2lb < 0, ka a a 1 fk...
eing how the variables in part (a) change with a reduction in n. Per-ﬁrm output, price, industry ¼ 1)] Æ [(a 1/ n, implying H c)/(n # þ (n/b)[(a # 1)]2, and W$ ¼ # n(1/n)2 1)b, c)/ 1/n. # ¼ Solutions to Odd-Numbered Problems 735 c h for I < 8,000. That is: for h < or 14,000 6,000 hours, welfare grant creates a kink in ...
ﬁrms. s0i; s si; s Uið iÞ % $ s BRið si is a best response for player i to Best Response rivals’ strategies, s_i, denoted by ; if Uið si 2 iÞ $ C Ceteris Paribus Assumption The assumption that all other relevant factors are held constant when examining the inﬂuence of one particular variable in an economic model. Reﬂec...
ative bundles of goods from which the individual derives equal levels of welfare. Indirect Utility Function A representative of utility as a function of all prices and income. Individual Demand Curve The ceteris paribus relationship between the quantity of a good an individual chooses to consume and the good’s price. A...
ts increasing returns. Constant returns to scale is the middle ground where both inputs and outputs increase by the same proportions. Mathematically, if f increasing returns, k = 1 constant returns, and k < 1 decreasing returns. ; k > 1 implies mk; ml mkf Þ ¼ k; l ð Þ ð concave [that is, U 0 risk aversion is measured b...
551–552 Comparative statistics analysis, 422 changes in input costs, 433–435 in general equilibrium model, 467–469 industry structure, 432 shifts in demand, 432–433 Compensated cross-price elasticity of demand, 165 Compensated demand curves, 155–159 compensating variation and, 170 deﬁned, 157 relationship between comp...
73–474 existence of equilibrium in exchange model, 474–475 ﬁrst theorem of welfare economics, 476–478 second theorem of welfare economics, 478–481 social welfare functions, 481–482 utility, initial endowments, and budget constraints, 472 vector notation, 471–472 Exchange economy, 479–481 Exchange value, labor theory of...
2 Leontief, Wassily, 320 Leontief production functions, 319–320, 330 Lerner, Abba, 378 Lerner index, 378 LES (linear expenditure system), 141–142 Lewbel, Arthur, 205 Lightning calculations, 117 Limitations and composite commodities, 197–200 Lindahl, Erik, 700 Lindahl equilibrium, 700–703 local public goods, 702–703 sho...
perpetuities, 632 bonds, 632–633 investment decisions, 618–623 Price controls and shortages, 441–442 disequilibrium behavior, 442 welfare evaluation, 442 Price discrimination, 513–517 deﬁned, 513 perfect, 514–515 second-degree, 517–519 third-degree, 515–517 Price dispersion, 546–547 Price elasticity, 163, 164 Price–ma...
rs’ Dilemma, 252–254 puppy dog and top dog, 555–556, 558–559, 573 pure, 259–260 trigger, 274–276 Strictly mixed strategies, 260 Subgame-perfect equilibrium, 271–273 Subramanian, S., 496 Substitutes, 189–191 asymmetry of gross deﬁnitions, 190–191 elasticity of, Shephard’s lemma and, 355 gross, 190 imperfect competition,...
tan, and Somalia, has an economic dimension. If you are going to be part of solving those problems, you need to be able to understand them. Economics is crucial. • It is hard to overstate the importance of economics to good citizenship. You need to be able to vote intelligently on budgets, regulations, and laws in gene...
mes the revenues to firms. Arrow “B” indicates this. Arrows A and B represent the two sides of the product market. Where do households obtain the income to buy goods and services? They provide the labor and other resources (e.g. land, capital, raw materials) firms need to produce goods and services in the market for in...
arkets. How else would buying and selling occur? The government heavily regulates decisions of what to produce and prices to charge. Heavily regulated economies often have underground economies (or black markets), which are markets where the buyers and sellers make transactions without the government’s approval. The qu...
on areas of advantage due to natural factors and skill levels; b) It encourages the agents to learn and invent; c) It allows agents to take advantage of economies of scale. Division and specialization of labor only work when individuals can purchase what they do not produce in markets. Learning about economics helps y...
adds up to Alphonso’s budget of $10. The relative price of burgers and bus tickets determines the slope of the budget constraint. All along the budget set, giving up one burger means gaining four bus tickets. This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 Chapter 2 \| Choice in a World o...
nity cost can alter behavior. Imagine, for example, that you spend $8 on lunch every day at work. You may know perfectly well that bringing a lunch from home would cost only $3 a day, so the opportunity cost of buying lunch at the restaurant is $5 each day (that is, the $8 buying lunch costs minus the $3 your lunch fro...
es. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? The opportunity cost would be the healthcare society has to forgo. Just as with Alphonso’s budget constraint, the slope of the production possibilities frontier shows the opportunity cost. By now yo...
a whole. Why Society Must Choose In Welcome to Economics! we learned that every society faces the problem of scarcity, where limited resources conflict with unlimited needs and wants. The production possibilities curve illustrates the choices involved in this dilemma. Every economy faces two situations in which it may ...
ive statements is not always crystal clear, economic analysis does try to remain rooted in the study of the actual people who inhabit the actual economy. Fortunately however, the assumption that individuals are purely self-interested is a simplification about human nature. In fact, we need to look no further than to Ad...
productive efficiency when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service) sunk costs costs that we make in the past that we cannot recover utility satisfaction, usefulness, or value one obtains from consuming goods and services KEY CONCEPT...
or their ties to celebrities. These examples represent an interesting facet of demand and supply. When economists talk about prices, they are less interested in making judgments than in gaining a practical understanding of what determines prices and why prices change. Consider a price most of us contend with weekly: th...
—Where Demand and Supply Intersect Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the horizontal axis, the demand curve and supply curve for a particular good or service can appear on the same graph. Together, demand and supply determine the price and the quantity t...
mption really means. In this particular case, after we analyze each factor separately, we can combine the results. The amount consumers buy falls for two reasons: first because of the higher price and second because of the lower income. How Does Income Affect Demand? Let’s use income as an example of how factors other ...
he price of a good or service causes a movement along a specific demand curve, and it typically leads to some change in the quantity demanded, but it does not shift the demand curve. This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 Chapter 3 \| Demand and Supply 57 Figure 3.9 Factors That ...
quantities supplied will be smaller, as Figure 3.14 illustrates. Figure 3.14 Supply Curve Shifts When the cost of production increases, the supply curve shifts upwardly to a new price level. This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 Chapter 3 \| Demand and Supply 61 Summing Up Facto...
nd population or changes in gasoline prices will affect many markets, not just cars. How can an economist sort out all these interconnected events? The answer lies in the ceteris paribus assumption. Look at how each economic event affects each market, one event at a time, holding all else constant. Then combine the ana...
slation to prevent a certain price from climbing “too high” or falling “too low.” The demand and supply model shows how people and firms will react to the incentives that these laws provide to control prices, in ways that will often lead to undesirable consequences. Alternative policy tools can often achieve the desire...
ters, as Figure 3.23 shows. The equilibrium price is $80 and the equilibrium quantity is 28 million. To see the benefits to consumers, look at the segment of the demand curve above the equilibrium point and to the left. This portion of the demand curve shows that at least some demanders would have been willing to pay m...
o an increased demand for organic foods. Graphically, the demand curve has shifted right, and we have moved up the supply curve as producers have responded to the higher prices by supplying a greater quantity. In addition to the movement along the supply curve, we have also had an increase in the number of farmers conv...
these 3. changes will affect supply or demand, and in what direction. a. There have recently been some important cost-saving inventions in the technology for making paint. b. Paint is lasting longer, so that property owners need not repaint as often. c. Because of severe hailstorms, many people need to repaint now. d....
A rise in demand b. A fall in demand c. A rise in supply d. A fall in supply This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 Chapter 3 \| Demand and Supply 81 56. Table 3.10 shows the supply and demand for movie tickets in a city. Graph demand and supply and identify the equilibrium. Then...
gton area is 34,000, and the equilibrium salary is $70,000 per year. This example simplifies the nursing market by focusing on the “average” nurse. In reality, of course, the market for nurses actually comprises many smaller markets, like markets for nurses with varying degrees of experience and credentials. Many marke...
e labor market to a new equilibrium salary and quantity. Technology and Wage Inequality: The Four-Step Process Economic events can change the equilibrium salary (or wage) and quantity of labor. Consider how the wave of new information technologies, like computer and telecommunications networks, has affected low-skill a...
our. We will see what happens. The following Clear It Up feature describes in greater detail some of the arguments for and against changes to minimum wage. What’s the harm in raising the minimum wage? Because of the law of demand, a higher required wage will reduce the amount of low-skill employment either in terms of ...
, personal (https://openstax.org/l/FRED_stlouis) . loans, mortgage loans, and more. You can find these at Shifts in Demand and Supply in Financial Markets Those who supply financial capital face two broad decisions: how much to save, and how to divide up their savings among different forms of financial investments. We ...
h level is nonbinding, and it will have no practical effect unless the equilibrium price soars high enough to exceed the price ceiling. 4.3 \| The Market System as an Efficient Mechanism for Information By the end of this section, you will be able to: • Apply demand and supply models to analyze prices and quantities • E...
is available for free at http://cnx.org/content/col12170/1.7 Chapter 4 \| Labor and Financial Markets 103 KEY TERMS interest rate the “price” of borrowing in the financial market; a rate of return on an investment minimum wage a price floor that makes it illegal for an employer to pay employees less than a certain hour...
demonstrating the health benefits of cocoa? Illustrate your answer with a demand and supply graph. growing and that their jobs are secure. c. Banks that have made home loans find that a larger number of people than they expected are not repaying those loans. d. Because of a threat of a war, people become uncertain abo...
e following Work It Out feature will walk you through calculating the price elasticity of demand. This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 Chapter 5 \| Elasticity 111 Finding the Price Elasticity of Demand Calculate the price elasticity of demand using the data in Figure 5.2 for an...
e value, using the midpoint method, the steps are decreasing as one moves from left to right, from 28.6% to 22.2% to 18.2%, because the quantity points in each percentage calculation are getting increasingly larger, which expands the denominator in the elasticity calculation of the percentage change in quantity. Consid...
t to search for and implement any breakthrough that allows it to reduce production costs. After all, if one firm decides not to implement such a cost-saving technology, other firms that do can drive them out of business. Since demand for food is generally inelastic, farmers may often face the situation in Figure 5.8 (a...
since 2013, has been controversial for it can delay industry profitability and therefore hamper startups and medical innovation. However, whether the tax burden falls mostly on the medical device industry or on the patients depends simply on the elasticity of demand and supply. Long-Run vs. Short-Run Impact Elasticitie...
savings = % change in quantity of financial s vings % change in interest rate Sometimes laws are proposed that seek to increase the quantity of savings by offering tax breaks so that the return on savings is higher. Such a policy will have a comparatively large impact on increasing the quantity saved if the supply curv...
pply or demand curve refers to a situation where a price change of one percent results in a quantity change of one percent. 5.3 Elasticity and Pricing In the market for goods and services, quantity supplied and quantity demanded are often relatively slow to react to changes in price in the short run, but react more sub...
n too many countries, workers found themselves out of a job. In developed countries, unemployment compensation provided a safety net, but families still saw a marked decrease in disposable income and had to make tough spending decisions. Of course, non-essential, discretionary spending was the first to go. Even so, the...
ttp://cnx.org/content/col12170/1.7 Chapter 6 \| Consumer Choices 137 Point T-Shirts Movies Total Utility T 0 8 0 + 100 = 100 Table 6.3 Finding the Choice with the Highest Utility Calculating Total Utility Let’s look at how José makes his decision in more detail. Step 1. Observe that, at point Q (for example), José consu...
3. If we trade two movies for one T-shirt, we would end up at point R (two T-shirts and four movies). Step 4. Choice 4 in Table 6.4 shows that if we move to point R, we would gain 21 utils from one more T-shirt, but lose 23 utils from two fewer movies, so we would end up with less total utility at point R. In short, th...
same quantity of bat consumption, but fewer cameras. Theoretically possible, but unlikely in the real world, we rule out choices like L because they would mean that a higher price for baseball bats means a greater consumption of baseball bats. After the price increase, Sergei will make a choice along the new budget co...
e money. The budget constraint framework serves as a constant reminder to think about the full range of effects that can arise from changes in income or price, not just effects on the one product that might seem most immediately affected. This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 C...
utility. In general, greater consumption of a good brings higher total utility. However, the additional utility people receive from each unit of greater consumption tends to decline in a pattern of diminishing marginal utility. We can find the utility-maximizing choice on a consumption budget constraint in several way...
raw or finished component materials to produce outputs. If the firm is successful, the outputs are more valuable than the inputs. This activity of production goes beyond manufacturing (i.e., making things). It includes any process or service that creates value, including transportation, distribution, wholesale and reta...
cheese and other toppings. The pizzaiolo uses a peel—the shovel-like wooden tool-- to put the pizza into the oven to cook. Once baked, the pizza goes into a box (if it’s for takeout) and the customer pays for the good. What are the inputs (or factors of production) in the production process for this pizza? Economists ...
aterials • Rent for land or buildings • Wages and salaries for labor • Interest and dividends for the use of financial capital (loans and equity investments) • Profit for entrepreneurship. Profit is the residual, what’s left over from revenues after the firm pays all the other costs. While it may seem odd to treat prof...

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