Chapter 1

Ten principles of Economics

Economy - Comes from the Greek word for one who manages a household. Scarcity - Society has less to offer than people wish to have. Economics - Is the study of how society manages its scarce resources. Principles of economics 1. 2. 3. 4. 5. 6. 7. 8. People face tradeoffs The cost of something is what you give up to get it Rational people think at the margin People respond to incentives Trade can make everyone better off Markets are usually a good way to organize economic activities Governments can sometimes improve market outcomes A countrys standard of living depends on its ability to produce goods and services 9. Prices rise when the government prints too much money 10.Society faces a short-run tradeoff between inflation and unemployment

Chapter 2
Thinking like an Economist
Circular-flow diagram - a visual model of the economy that shows how dollars flow through markets among households and firms. Production possibilities frontier - A graph that shows the combination of output that the economy can possibly produce given the available factors of production and the available production technology. Positive statements - Claims that attempt to describe the world as it is. Normative statements - Claims that attempt to prescribe how the world should be.

Chapter 3
Interdependence and gains from trade
Absolute advantage - The comparison among producers of a good according to their productivity. Opportunity cost - Whatever must be given up to obtain some item.

Comparative advantage - The comparison among producers of a good according to their opportunity cost. Imports - Goods produced abroad and sold domestically. Exports - Goods produced domestically and sold abroad.

Chapter 4
The market forces of supply and demand
Market - A group of buyers and sellers of a particular good or service. Competitive market - A market in which there are many buyers and many sellers so that each has a negligible impact on the market price. Quantity demanded - The amount of a good that buyers are willing and able to purchase. Law of demand - The claim that, other things brings equal, the quantity demanded of a good falls when the price of the good rises. Normal good - A good for which, other things being equal, an increase in income leads to an increase in quantity demanded.

Inferior good - A good for which, other things being equal, an increase in income leads to a decrease in quantity demanded. Substitutes - Two goods for which an increase in the price of one good leads to an increase in the demand for the other good. Complements - Two goods for which an increase in the price of one good leads to a decrease in the demand for the other good. Law of supply - The claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises. Supply schedule - A table that shows the relationship between the price of a good and the quantity supplied. Equilibrium - A situation in which supply and demand have been brought into balance. Equilibrium price - The price that balances supply and demand. Excess supply - A situation in which quantity supplied is greater than quantity demanded. Law of supply and demand - The claim that price of any good adjusts to bring the supply and demand for that good into balance.

Chapter 5
Elasticity and its application
Elasticity - A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.

Chapter 6
Supply, demand, and government policies
Price ceiling - A legal maximum on the price at which good can be sold. Price floor - A legal maximum on the price at which a good can be sold. Tax incidence - The study of who bears the burden of taxation.

Chapter 7
Consumers, producers, and the efficiency of markets
Welfare economics - The study of how the allocation of resources affects economic well-being.

Willingness to pay - The maximum amount that a buyer will pay for a good. Consumer surplus - The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. Cost - The value of everything a seller must give up to produce a good. Producer surplus - The amount a seller is paid for a good minus the sellers cost of providing it. Efficiency - The property of a resource allocation of maximizing the total surplus received by all members of society. Equality - The property of distributing economic prosperity uniformly among the members of society.

Chapter 8
The costs of taxation
Deadweight loss - The fall in total surplus that results from a market distortion such as tax.

Chapter 9

International trade
World price - The price of a good that prevails in the world market for that good. Tariff - A tax on goods produced abroad and sold domestically.

Chapter 10
Externalities
Externality - The uncompensated impact of one persons actions on the well-being of a bystander. Coase theorem - The proposition that if private properties can bargain without cost over the allocation of resources, they can solve problems of externalities on their own. Transaction cost - The cost that parties incur in the process of agreeing to and following through on a bargain. Corrective tax - A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality.

Chapter 11
Public goods and common goods

Excludability - The property of a good whereby a person can be prevented from using it. Private goods - Goods that are both excludable and rival in consumption. Public goods - Goods that are neither excludable nor rival in consumption. Common resources - Goods that are rival in consumption but not excludable. Cost benefits analysis - A study that compares the costs and benefits to society of providing a public good.