The Market Forces of Supply and Demand (CH04)

4-1 Markets and Competition
4-1a What Is a Market?
4-1b What Is Competition?

4-2 Demand
4-2a The Demand Curve: The Relationship between Price and Quantity Demanded
4-2b Market Demand versus Individual Demand
4-2c Shifts in the Demand Curve

4-3 Supply
4-3a The Supply Curve: The Relationship between Price and Quantity Supplied
4-3b Market Supply versus Individual Supply
4-3c Shifts in the Supply Curve

4-4 Supply and Demand Together
4-4a Equilibrium
4-4b Three Steps to Analyzing Changes in Equilibrium

Summary

• Economists use the model of supply and demand to analyze competetitive markets. In a competetitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.
• The demand curve shows how the quantity of a good demanded depends on the price. According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward.
• In addition to price, other determinants of how much consumers want to buy include income the prices of substitute and complements, tastes, expectations, and the number of buyers. If one of these factors changes, the demand curve shifts.
• The supply curve shows how the quantity of a good supplied demands on the price. According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward.
• In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers. If one of these factors changes, the supply curve shifts.
• The intersection of the supply and demand curves determines the market equilibrium. At the equilibrium price, the quantity demanded equals the quantity supplied.
• The behavior of buyers and sellers naturally drives markets toward their equilibrium. When the market price is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. When the market price is below the equilibrium price, there is a shortage, which cause the market price to rise.
• To analyze how any event influence a market, we use the supply-and-demand diagram to examine how the event affects the equilibrium price and quantity. To do this, we follow three steps. First, we decide whether the event shifts the supply curve or the demand curve (or both). Second, we decide in which direction the curve shifts. Third, we compare the new equilibrium with the initial equilibrium.
• In market economics, prices are the signals that guide economic decisions and thereby allocate scarce resources. For every good in the economy, the price ensures that supply and demand are in balance. The equilibrium price then determines how much of the good buyers choose to consume and how much sellers choose to produce.

Key Concepts:

Markets:
Competitive market:
Quantity demanded:
Law of demand
Demand schedule
Demand curve
Normal Good
Inferior good
Substitutes
Complements
Quantity supplied
Law of Supply
Supply schedule
Supply curve
Equilibrium
Equilibrium price
Equilibrium quantity
Surplus
Shortage
Law of supply and demand

Interdependence and the Gains from Trade (CH03)

3-1 A Parable for the Modern Economy

3-1a Production Possibilities

3-1b Specialization and Trade

3-2 Comparative Advantage: The Driving Force of Specialization

3-2a Absolute Advantage

3-2b Opportunity Cost and Comparative Advantage

3-2c Comparative Advantage and Trade

3-2d The Price of the Trade

3-3 Applications of Comparative Advantage

3-3a Should Tom Brady Mow His Own Lawn?

3-3b Should the United States Trade with Other Countries?

Summary:

• Each person consumes goods and services produced by many other people both in the United States and around the world. Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.
• There are two ways to compare the ability of two people to produce a good. The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing the good. The person who has the smaller opportunity cost of producing the good is said to have a comparative advantage. The gains from trade are based on comparative advantage, not absolute advantage.
• Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage.
• The principle of comparative advantage applies to countries as well as to people. Economists use the principle of comparative advantage to advocate free trade among countries.

Key Concepts:

Absolute advantage: The ability to produce a good using fewer inputs than another producer.

Opportunity Cost: Whatever must be given up to obtain some item.

Comparative advantage: The ability to produce a good at a lower opportunity cost than another producer.

Imports: Goods produced abroad and sold domestically.

Exports: Goods produced domestically and sold abroad.

Thinking Like an Economist (CH02)

2-1 The Economist as Scientist

2-1a The Scientific Method: Observation, Theory, and More Observation
2-1b The Role of Assumptions
2-1c Economic Models
2-1d Our First Model: The Circular-Flow Diagram
2-1e Our Second Model: The Production Possibilities Frontier
2-1f Microeconomics and Macroeconomics

2-2a Positive versus Normative Analysis
2-2b Economists in Washington
2-2c Why Economists' Advice Is Not Always Followed


2-3 Why Economists Disagree

2-3a Differences in Scientific Judgments
2-3c Perception versus Reality

Summary

• Economists try to address their subject with a scientist's objectivity. Like all  scientists, they make appropriate assumptions and build simplified models to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier.
• The field of economics is divided into two subfields: microeconomics and macroeconomics. Microeconomist study decision making by households and firms and their interaction among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole.
• A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. When economist make normative statements, they are acting more as policy advisers than as scientists.
• Economists who advise policy makers sometimes offer conflicting advice either because of differences in scientific judgments or because of difference in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore the advice because of the many forces and constraints imposed by the political process.

Key Concepts

• Circular-flow diagram: A visual model o f the economy that shows how dollars flow though markets among households and firms.
• Production possibilities frontier: A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

• Microeconomics: The study of how households and firms make decisions and how they interact in markets.
• Macroeconomics: The study of economy wide phenomena, including inflation, unemployment, and economic growth. 
• Positive statement: Claims that attempt to describe the world as it is.
• Normative statements: Claims that attempt to prescribe how the world should be.