## The Uses of Indifference Contours

What to Read For Do economists actually have precise measurements of the shapes of indifference curves If not, why bother with the idea Is it possible to answer interesting social questions using indifference curves, even though we don't precisely know their shapes Is it better to give small towns cheap mail or direct cash subsidies Can an offer of free, public education sometimes lower the amount of education consumed How do indifference curves answer such questions Like crossword puzzles and...

## Many Inputs Constant Returns to Scale and the Fundamental Theorem

What to Read For How does a firm decide how much of several factors of production to hire What is the problem of the exhaustion of the product What geometrical device generates a constant-returns-to-scale production function What is the Cobb-Douglas production function Does the Cobb-Douglas production function always exhibit constant returns to scale How can a competitive firm have constant returns to scale What is the Fundamental Theorem of Marginal Productivity The point at which labor's...

## The Interest Rate

What to Read For Why is a dollar later worth less than a dollar now What is the full rental rate of capital What is the difference between nominal and real interest rates What are discounting, present value, perpetuities, and the general discounting formula How does the expected future return affect asset prices now The Opportunity A dollar tomorrow is not worth as much as a dollar today, because there is a Cost of Waiting positive rate of in teres t( the next section discusses the reasons for...

## Indifference Curves In Transport

Pure Price or Income Substitution Effect Effect offer if it does not put him somewhere better than or equal to the point Start. He will insist on being in or on the entire shaded region above the Starting Indifference Curve. Think about that for a second To be worth taking, an offer has to make you better off (or at least no worse off). The railway, on the other hand, will not make an offer that is outside its budget line, Lower Price. The point Bankruptcy, for instance, is an offer of so much...

## Problems For Section 221

The public school system accepts the wage, but decides that at the higher wage it needs fewer teachers (average class sizes rise, teachers of calculus and football are dropped, etc.). Now is the complaint true 3. Bumper sticker 30 Hours Work for 40 Hours Pay Means More Jobs. Comment. 4. In Japan, workers cannot be fired once they have been hired, and therefore in Japan a minimum wage law would not cause unemployment. 5. Effective minimum wages in trucking increase the demand for truck-driving...

## Living in Paradise The Uses of Measurable Utility

What to Read For what is the utility of income1 What role does it play in thinking about gambling What is risk aversion How is it related to the shape of the utility of income curve What is fair insurance Why does a criminal take a chance on being caught Why shouldn't you put all your eggs in one basket The Utility of What has been fruitful about the idea of measurable utility is not the measure-Income ments themselves (few have actually been done), but the tools for understanding consumer...

## Consumers Surplus The Elements

What to Read For What is value in exchange Value in use Consumers' surplus How is consumers' surplus related to the area under a demand curve How is the area under a demand curve related to what society should pay for a bridge What price should be charged to cross a bridge What is producers' surplus What are some alternative names for it Why does competitive equilibrium make the sum of producers' and consumers' surplus as large as possible Does the equilibrium leave any mutually advantageous...

## Industry Supply with a Fixed Number of Firms and Costs Independent Optimality find Upward Slope

What to Read For How is the marginal cost curve for a competitive firm related to its supply curve How do the curves of marginal cost for a bunch of individual firms add up to make the supply curve for the industry Why are profits necessary to get the individual firms to produce the efficient amount Would it be good if some of the firms did not pursue profit Why does the supply curve of the industry always slope upward Recall that the theory of the typical consumer of utility functions, budget...

## Info

You and the world cannot have unlimited amounts of books or food. In Figure 1.1 the area marked Unattainable is just that. Fungibility The diagrammatic way of putting it makes clear that each book is scarce, though it is not the last book that uses up the allotment of books. The reason is that the scale treats all books alike. They can be substituted one for the other. They are, to use a strange word popular among economists, fungible. The notion that scarce goods...

## Income in the Budget Line

What to Read For How is income represented in a budget line Is income in the form of particular goods (housing, food) as useful to the consumer as the same value in money Do people with higher incomes face lower prices In a two-good diagram, how does one represent a rise in income using a budget line What is the income effect What is a normal good An inferior good How do you express budget lines in algebra Income Is the Height The budget line facing a consumer has a slope that measures the...

## Simple Solutions Bertrand and Cournot

What to Read For How do two sellers alone in a market behave What if they cooperate fully What if they maximize selfishly and assume the other will keep his price constant What if they assume the other will keep his quantity constant What are the Bertrand and Cournot solutions How do you prove the Cournot solution diagrammatically How do you apply it or its dual to the case of end-to-end railroads Starting with Few The last chapter attempted to develop a good theory that is intermediate between...

## Scarcity and the Budget Line

What to Read For1 What do economists mean by scarcity Are most things scarce What are fungible goods, and how is this concept related to scarcity Which point won the game What unit sets the value of a pile of goods What is a budget line, and how is it related to scarcity What is opportunity cost, and what is its relation to the price of one thing in terms of another How do you calculate relative price, given two money prices In a two-good diagram, how is a rise in the price of one of the goods...

What to Read For Can one really measure utility, or marginal utility What, then, does an indifference curve say Do indifference curves need to be ordinal or cardinal to describe sensible consumer behavior Is it possible to draw indifference curves by simply observing the behavior of consumers How The talk of marginal utility and contour lines on a hill of utility began to make economists uncomfortable almost as soon as it started. How is one to measure utility To put it another way, how could...

## The Pursuit of Happiness

What to Read For How does a consumer choose between different combinations of goods What is the hill of utility Indifference curves How do you represent people with preferences for one good over another How do the indifference curves look between a good and a bad How are indifference curves useful for thinking about the nation's choices A consumer, then, has a budget line. The budget line constrains him to certain possibilities such is the world of scarcity we inhabit. But he still has choices...

## Cost Curves in Use Fixed and Variable Costs

What to Read For How do the total cost curve and the total revenue curve determine how much a firm wants to produce Are past, sunk costs relevant Why not Are fixed costs relevant What are the two meanings of fixed costs The Point of After so much attention to the domestic affairs of the firm, it is now time to Maximum Profit return to its foreign affairs, that is, its decision of how much to produce for Revisited sale. The story is really just a review, because you already know how a firm...

## Production and Specialization

What to Read For What is the specialization theorem How is opportunity lost related to specialization What is the division of labor Comparative advantage How is free trade related to specialization Why is free trade good Why does a society's production possibility curve bulge outward Why does its supply curve of, say, food slope upward Look at the True The theory of demand, just completed, asks how people behave given a budget Opportunity Cost line the theory of supply, now begun, asks how the...

## SJl The Production Function Also Leads to the Production Possibility Curve

What to Read For What is the production function Why is it more measurable than a utility function What is a Leon tief production function An isoquant Why are isoquants usually curved instead of sharp-cornered How does the idea that there is more than one way to skin a cat relate to isoquants How exactly do production functions connect with the production possibility curve Why does the production possibility curve bulge out The fundamental idea in the theory of supply is, to repeat, the idea of...

## The Profit Motive

What to Read For What is the best guess that economics has about what motivates the owner of a firm Can you always believe people when they claim not to be motivated by money Will a hired manager always care to do what is best for the owner How can the owner put a stop to the manager's lack of care Can he completely stop it How can the simple money-making theory be used as a standard against which to measure the value of nonpecuniary rewards What Does the Firm The theory of the firm asks why...

## Problems For Section

Suppose that you wanted to find how much of the 15 or so per year growth of cotton cloth production in the United States 1815 to 1833 was attributable to technological change (the coming of the power loom and the factory) and how much to demand (the rise of population and incomes and the transport improvements that made the demand of the West available to the factories of the East). The problem is evidently one of supply and demand. Suppose that the demand curve can be represented as Q DPin...

## Advanced Applications of Simple Monopoly

What to Read For Does a monopolist always end up exactly where marginal cost equals marginal revenue How does the output and price of a monopolist change if the monopolist has a price ceiling imposed on him How can this idea be used to undermine cartels What is a counterfactual Can one compare monopoly and competition Are monopolies always bad Are patents, which are monopolies, always bad The Monopoly's The analysis of monopoly is an alternative to supply and demand. The alternative Information...

## Adding Up Supply and Demand Equilibrium

What to Read for How do you go from a single person's demand curve to a whole market's demand curve The market's supply curve What is equilibrium, geometrically speaking What is the significance of the phrase the market must clear What is the relation between quantities supplied and quantities demanded at the equilibrium price How do movements in the price and quantity depend on shifts in the supply schedule On shifts in the demand schedule How can one infer from price and quantity movements...

## Adding Up Supply and Demand The Diagrams for Analyses

What to Read For What is the Law of One Price Why is it necessary for using supply and demand curves What is the general technique for handling questions involving supply and demand How does the equilibrium price determine how much is demanded or supplied by each segment of the demanders or the suppliers How do you prove that a small demander or supplier should think of herself as a price taker The Law of One Price Another way of putting the idea that a market must clear is the Law of One...

## Prices in the Budget Line The Law of Demand

What to Read For What happens to the amount of a good demanded when its price changes What is the Law of Demand Do consumers do what they do out of habit Is gold more expensive than a haircut How do money prices and relative prices figure in the Law of Demand Does the ratio of prices or the difference between prices matter to how much is consumed Does an equiproportional increase in all prices and money income have any effect on amounts consumed Why should you believe the Law of Demand What is...

## Problems for Section 222

If the marginal product of labor is 0, output would not have fallen at all. If labor's MP was less than the wage, output would have fallen by less than the wage this relies on the fact that the change 5 million out of several hundred million was small see Problem 4. If labor's MP equaled the wage, output would have fallen by the amount of the wages paid to workers killed. On this evidence, there was no surplus labor in India. 3. True. With rising marginal product at any rate for a firm...

## Problems for Section 171

Most of the answer is high school algebra. Two points on the curve are 219 units of money relative to 100 as the world price and 5 million pounds and 112.5 units of money and 16 million pounds. The demand curve, if straight, takes the general form Q D dP. These points imply that the slope, b, was 16 5 219 1 12.5 0.1033. One must keep this many digits to keep the rounding error small. Taking either pair of numbers yields the intercept, D, by D Q bP 1 6 0.10 112.5 27.62. The demand curve in...

## The Economics of Ethics

What to Read For What is positive economics What is normative economics Should economists make moral judgments about the economy What is laissez-faire Why might laissez-faire be a Good Thing How do you show this with a utility possibility curve What is utilitarianism What is the bliss point and how is it related to the laissez-faire point How can you show tastes for equality What is an egalitarian Why Bother with People are not satisfied with merely understanding how the economy...

## Equimarginality How the Firm Produces What It Produces at Minimum Cost

What to Read For How does a firm decide how to allocate internally How much does it take from each plant What is the Principle of Equimarginality Is the average cost of each plant relevant What is the don't-do-it-yourself principle 14 David Landes, The Unbound Prometheus Technological Change and Industrial Development in Western Europe from 1750 to the Present Cambridge Cambridge University Press, 1969 , p. 132. The idea that profit is at a maximum when marginal benefit is equal to marginal...

## V

Q Suppose that an economy produces and consumes two goods, an energy-intensive good and all others. The sages of the community determine that too much of the energy-intensive good is being produced and order its production cut. Illustrate how income declines in a diagram of the community's production possibility curve and indifference curves. A The community starts at Start but see the comment following and refer to Figure 9.7 . It finishes at Finish, the edict requiring that the amount of the...

## J2 The Shape of Indifference Curves

What to Read For what does an indifference curve usually look like What are the extremes within which the shape of a typical indifference curve must fall What does an indifference curve between two perfect complements look like Between two perfect substitutes When two goods are complements, does the pricing of either good alone matter to the consumer Can the prices of substitutes vary relative to each other What is the marginal rate of indifferent substitution, or the marginal valuation How...

## Exercises For Section

Describe the effect on Zecher's choice of a combination of corn and books of a. A fall in the price of corn. c. A decline in his desire to read. 2. Much of what university professors do has nothing directly to do with their teaching. They do research, attempting to expand our knowledge of economics or of the past or of the chemistry of plastics. Show in an indifference curve diagram a. The indifference curves between teaching and research of the typical professor as contrasted with the...