Dilemma of Regulation

Comparing results of the socially optimal price (P MC) and the fair-return price (P ATC) suggests a policy dilemma, sometimes termed the dilemma of regulation. When its price is set to achieve the most efficient allocation of resources (P MC), the regulated monopoly is likely to suffer losses. Survival of the firm would presumably depend on permanent public subsidies from tax revenues. Conversely, although a fair-return price (P ATC) allows the monopolist to cover costs, it only partially...

Rent Controls

Rent controls are maximum rents established by law (and recently, rent controls have set maximum rent increases for existing tenants). Such laws are well intended their goals are to protect low-income families from escalating rents caused by perceived housing shortages and to make housing more affordable to the poor. When controls are first imposed, they usually restrict increases in rents above current levels. The short-run supply curve for rental accommodation is inelastic because it takes...

Terms And Concerts

Agribusiness, p. 515 support prices, p. 517 Canadian Wheat Marketing Board, p. 518 1. KEY QUESTION Carefully evaluate The supply and demand for agricultural products are such that small changes in agricultural supply result in drastic changes in prices. However, large changes in farm prices have modest effects on agricultural output. (Hint A brief review of the distinction between supply and quantity supplied may be helpful.) Do exports increase or reduce the instability of demand for farm...

Info

Explain and evaluate Industry complains of the higher taxes it must pay to finance subsidies to agriculture. Yet the trend of agricultural prices has been downward while industrial prices have been moving upward, suggesting that on balance agriculture is actually subsidizing industry. 6. Because consumers as a whole must ultimately pay the total incomes received by farmers, it makes no real difference whether the income is paid through free farm markets or through price supports supplemented by...

Unions And Government Restraints

Wage differentials may be reinforced by artificial restrictions on mobility imposed by unions and government. We have noted that craft unions find it to their advantage to restrict membership. After all, if carpenters and bricklayers become too plentiful, the wages they can command will decline. Thus, the low-paid nonunion carpenter of Edmonton, Alberta, may be willing to move to Vancouver in the pursuit of higher wages, but her chances for succeeding are slim. She may be unable to get a union...

Demand For Loanable Funds

Businesses borrow loanable funds primarily to add to their stocks of capital goods, such as new plants or warehouses, machinery, and equipment. Assume that a firm wants to buy a machine that will increase output and sales such that the firm's total revenue will rise by 110 for the year. Also assume that the machine costs 100 and has a useful life of just one year. Comparing the 10 earned with the 100 cost of the machine, we find that the expected rate of return on this investment is 10 percent...

Modern View of Technological Advance

For decades most economists regarded technological advance as being external to the economy a random outside force to which the economy adjusted. Periodically fortuitous advances in scientific and technological knowledge occurred, paving the way for major new products (automobiles, airplanes) and new production processes (assembly lines). Firms and industries, each at its own pace, then incorporated the new technology into their products or processes to enhance or maintain their profit. Then...

Causes of Income Inequality

There are several causes of income inequality in Canada. In general, the market system is an impersonal mechanism that embodies no conscience concerning what is an equitable or just distribution of income. It is permissive of a high degree of income inequality because it rewards individuals based on the contribution that their resources make to producing society's output. The factors that contribute to income inequality follow. People have different mental, physical, and aesthetic talents. Some...

Shifts In Locations Of Curves

The locations of the marginal-cost and marginal-benefit curves in Figure 18-6 are not forever fixed. They can, and probably do, shift over time. For example, suppose that the technology of pollution-control equipment were to improve noticeably. We would expect the cost of pollution abatement to fall, society's MC curve to shift rightward, and the optimal level of abatement to rise. Or suppose that society were to decide that it wanted cleaner air and water because of new information about the...

The Market System at Work

An economic unit (of one or more persons) that provides the economy with resources and uses the income received to purchase goods and services that satisfy material wants. FIRM An organization that employs resources to produce a good or service for profit. The four questions that every economy must answer. There are two primary decision makers in a market economy households (consumers) and firms (businesses). Households are the ultimate suppliers of economic resources and simultaneously the...

Minimum Efficient Scale and Industry Structure

Economies and diseconomies of scale are an important determinant of an industry's structure. Here we introduce the concept of minimum efficient scale (MES), which is the lowest level of output at which a firm can minimize long-run average costs. In Figure 8-9(a) that level occurs at q1 units of output. Because of the extended range of constant returns to scale, firms producing substantially greater outputs could also realize the minimum attainable average costs. Specifically, firms within the...

De Beers Diamonds Are Monopolies Forever

De Beers was one of the world's strongest and most enduring monopolies. But in mid-2000 it announced that it could no longer control the supply of diamonds and thus would abandon its 66-year policy of monopolizing the diamond trade. De Beers, a Swiss-based cartel controlled by a South African corporation, produces about 50 percent of the world's rough-cut diamonds and purchases for resale a sizable number of the rough-cut diamonds produced by other mines worldwide. As a result, De Beers markets...

Monopsony

A market structure in which there is only a single buyer of a good, service, or resource. < www.idg.net crd_monopsony_ 307867_103.html> What is monopsony < www.idg.net crd_monopsony_ 307867_103.html> What is monopsony revenue products of 14, 1 , and 12, respectively, then the firm's total revenue is 9 ( 14 + 1 + 12). In Figure 15- (b), where we are not restricted to whole units of labour, total revenue is represented by area 0abc under the MRP curve to the left of qc. What area...

Women And Expanded Production Possibilities

A large increase in the number of employed women has shifted the U.S. production possibilities curve outward. capital goods enhance domestic productivity. Expanded Job Access Greater access to jobs is a second factor increasing the employment of women. Service industries teaching, nursing, and clerical work, for instance that traditionally have employed mainly women have expanded in the past several decades. Also, population in general has shifted from farms and rural regions to urban areas,...

Risk And Profit

In a real, dynamic economy the future is not predictable there is uncertainty. This means that the entrepreneur must assume risks. Some or all economic profit may be a reward for assuming risks. In linking economic profit with uncertainty and risk-bearing, we must distinguish between risks that are insurable and risks that are not. Some types of risk fire, floods, theft, and accidents to employees are measurable that is, their frequency of occurrence can be estimated accurately. Firms can avoid...

Obstacles To Collusion

Normally, cartels and similar collusive arrangements are difficult to establish and maintain. We look now at several barriers to collusion. Demand and Cost Differences When oligopolists face different costs and demand curves, it is difficult for them to agree on a price, which is particularly true in industries where products are differentiated and change frequently. Even with highly standardized products, firms usually have somewhat different market shares and operate with differing degrees of...

Full Employment Versus Unemployment

Our model assumes full employment in the sending and receiving countries. Mexican workers presumably leave low-paying jobs to take (more or less immediately) higher-paying jobs in Canada. However, in many cases the factor that pushes immigrants from their homelands is not low wages but chronic unemployment and underemployment. Many developing countries are overpopulated and have surplus labour workers are either unemployed or so grossly underemployed that their marginal revenue product is zero....

Economies Of Scale

Economies of scale, or economies of mass production, explain the downsloping part of the long-run ATC curve. As plant size increases, a number of factors will for a time lead to lower average costs of production. Labour Specialization Increased specialization in the use of labour becomes more achievable as a plant increases in size. Hiring more workers means jobs can be divided and subdivided. Each worker may now have just one task to perform instead of five or six. Workers can work full time...

Internet Application Questions

More Labour Resources What is the Evidence for Canada and France Go to the U.S. Bureau of Labor Statistic's Web site www.bls.gov and click Data and then Most Requested Series. Click International Labor Statistics and retrieve Canadian employment data for the period of the last 10 years. How many more workers were there at the end of the 10-year period than at the beginning Next find the total employment growth of Italy over the last 10 years. In which of the two countries did more labour...

Asymmetric Information

A situation in which one party to a market transaction has much more information about a product or service than the other does. the industrially advanced nations agreed in the 1997 Kyoto Protocol to cut their greenhouse gas emissions 6 to 8 percent below 1990 levels by 2012. Canada committed to a 6 percent reduction below 1990 levels by 2012. Many contentious issues remain to be resolved through further meetings and negotiations. For example, to what extent should developing nations such as...

Figure 161 J The Determination Of Land Rent

Because the supply S of land and other natural resources is perfectly inelastic, demand is the sole active determinant of land rent. An increase in demand from D2 to D1 or a decrease in demand from D2 to D3 will cause a considerable change in rent from R2 to R1 in the first instance and from R2 to R3 in the second. But the amount of land supplied will remain at 0. If demand is very weak D4 relative to supply, land will be a free good, commanding no rent. lt www.theshortrun.com classroom...

Price Leadership Model

Price leadership is a type of implicit understanding by which oligopolists can coordinate prices without engaging in outright collusion based on formal agreements and secret meetings. Rather, a practice evolves whereby the dominant firm usually the largest or most efficient in the industry initiates price changes and all other firms more or less automatically follow the leader. Many industries, including farm machinery, cement, newsprint, glass containers, steel, beer, fertilizer, cigarettes,...

Rentseeking Behaviour

The appeal to government for special benefits at taxpayers' or someone else's expense is called rent seeking. To economists, rent is a payment beyond what is necessary to keep a resource supplied in its current use. Corporations, trade associations, labour unions, and professional organizations employ vast resources to secure favourable government policies that result in rent higher profit or income than would occur under competitive market conditions. The government is able to dispense such...

Price And Output

Assume once again that there are three oligopolistic firms Gypsum, Sheetrock, and GSR producing, in this instance, homogeneous products. All three firms have identical cost curves. Each firm's demand curve is indeterminate unless we know how its rivals will react to any price change. Therefore, we suppose each firm assumes that its two rivals will match either a price cut or a price increase. In other words, each firm has a demand curve like the straight line D1 in Figure 11-6 a . And, since...

Microeconomics Of Resource Markets

KEY QUESTION Explain why economic rent is a surplus payment when viewed by the economy as a whole but as a cost of production from the standpoint of individual firms and industries. Explain Rent performs no 'incentive function' in the economy. 3. If money is not an economic resource, why is interest paid and received for its use What considerations account for the fact that interest rates differ greatly on various types of loans Use those considerations to explain the relative sizes of the...

Maximizing Profit

Will 50 units of output maximize the firm's profit No, because the profit-maximizing terms of equation 2 are not satisfied when the firm employs three units of labour and two of capital. To maximize profit, each input should be employed until its price equals its marginal revenue product. But for three units of labour, labour's MRP in column 5 is 12 while its price is only 8 the firm could increase its profit by hiring more labour. Similarly, for two units of capital, we see in column 5' that...

The Organization And The Costs Of Production

He has 40,000 of his own funds invested in equipment pottery wheels, kilns, and so forth that could earn him 4000 per year if alternatively invested. He has been offered 15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth 3000 per year. Total annual revenue from pottery sales is 72,000. Calculate the accounting profit and the economic profit for Gomez's pottery firm. 5. Which of the following are short-run and which are long-run...

Poverty In The Voices Of Poor People

While statistics tell us much about poverty and inequality, the statements below attest to the human suffering caused by insufficient material means in many nations. being turns out to be very important. Lack of food, shelter, and clothing is mentioned everywhere as critical. In Kenya a man says Don't ask me what poverty is because you have met it outside my house. Look at the house and count the number of holes. Look at my utensils and the clothes I am wearing. Look at everything and write...

B 2

Explain graphically how indifference analysis can be used to derive a demand curve. 6. Advanced analysis Demonstrate mathematically that the equilibrium condition MRS PB PA is the equivalent of the utility-maximizing rule MUA PA MUB PB. McConnell-Brue-Barbiero II. Microeconomics of Microeconomics, Ninth Product Markets Canadian Edition 8. The Organization and Costs of Production McConnell-Brue-Barbiero II. Microeconomics of Microeconomics, Ninth Product Markets Canadian Edition 8. The...

Eliminating Occupational Segregation

Now assume that through legislation or sweeping changes in social attitudes, discrimination disappears. Women, attracted by higher wage rates, shift from occupation Z to X and Y one million women move into X and another one million move into Y. Now there are four million workers in Z and occupational segregation is eliminated. At that point there are four million workers in each occupation, and wage rates in all three occupations are equal, here at B. That wage equality eliminates the incentive...

Market Model

Number of firms Type of product Control over price Conditions of entry Nonprice competition Some, but within rather narrow limits Considerable emphasis on advertising, brand names, trademarks Standardized or differentiated Limited by mutual interdependence considerable with collusion Significant obstacles Typically a great deal, particularly with product differentiation Steel, automobiles, farm implements, many household appliances A firm in a purely competitive market that cannot change market...

Voting Outcomes

The lower part of Table 19-1 shows the outcomes of three hypothetical decisions of the majority vote. In the first, national defence wins against the road because a majority of voters Adams and Conrad prefer national defence to the road. In the second election to see whether this community wants a road or a severe-weather warning system, a majority of voters Adams and Benson prefer the road. We have determined that the majority of people in this community prefer national defence to a road and...

Statistical Discrimination

Judging individuals on the average characteristic of the group to which they belong rather than on their own personal characteristics. STOCKS CORPORATE Ownership shares in a corporation. SUBSTITUTE GOODS Products or services that can be used in place of each other. When the price of one falls the demand for the other falls, and conversely with an increase of price. SUBSTITUTION EFFECT 1 A change in the quantity demanded of a consumer good that results from a change in its relative...

Study Questions

Describe the four major economic flows that link Canada with other nations. Provide a specific example to illustrate each flow. Explain the relationships between the top and bottom flows in Figure 5-1. 2. How important is international trade to the Canadian economy Who is Canada's most important trade partner How can persistent trade deficits be financed Trade deficits mean we get more merchandise from the rest of the world than we provide them in return. Therefore, trade deficits are...

Ing The Most From

The economic problem is at the heart of the definition of economics stated in Chapter 1 Economics is the social science concerned with the roblem of using scarce resources to attain the maximum fulfillment of society's unlimited wants. Economics is concerned with doing the best with what we have. Economics is thus the social science that examines efficiency the best use of scarce resources. Society wants to use its limited resources efficiently it desires to produce as many goods and services...

The Short Run Profit or Loss

The monopolistically competitive firm maximizes its profit or minimizes its loss in the short run just as the other firms we have discussed do by producing the output at which marginal revenue equals marginal cost MR MC . In Figure 11-2 a the firm produces output Q1, where MR MC. As shown by demand curve D1, the firm then can charge price P1. It realizes an economic profit, shown by the grey area P1 - A1 x Q1j. But with less favourable demand or costs, the firm may incur a loss in the short...

Shifts In Production Possibilities Curves

Canada has recently experienced a spurt of new technologies relating to computers, communications, and biotechnology. Technological advances have dropped the prices of computers and greatly enhanced their speed. Cellular phones and the Internet have increased communications capacity, enhancing production and improving the efficiency of markets. Advances in biotechnology, specifically genetic engineering, have resulted in important agricultural and medical discoveries. Many Part One An...

Correcting For Spillover Costs

Government can do two things to correct the overallocation of resources. Both solutions are designed to internalize external costs that is, to make the offending firm pay the costs rather than shift them to others Legislation In cases of air and water pollution, the most direct action is legislation prohibiting or limiting the pollution. Such legislation forces potential polluters to pay for the proper disposal of industrial wastes here, by installing smoke-abatement equipment or...

The Income Effect

The income effect is the impact that a change in a product's price has on a consumer's real income and, consequently, on the quantity of that good demanded. Let's suppose our product is a coffee drink such as a latte or cappuccino. If the price of such drinks declines, the real income or purchasing power of anyone who buys them increases that is, they are able to buy more with the same nominal income. The increase in real income will be reflected in increased purchases of many normal goods,...

Rule for Employing Resources Mrp Mrc

The MRP schedule, shown as columns 1 and 6, is the firm's demand schedule for labour. To explain why, we must first discuss the rule that guides a profit-seeking firm in hiring any resource To maximize profit, a firm should hire additional units of a specific resource as long as each successive unit adds more to the firm's total revenue than it adds to total cost. Economists use special terms to designate what each additional unit of labour or other variable resource adds to total cost and what...

Factors Of Production

Economic resources land, capital, labour, and entrepreneurial ability. The entrepreneur is an innovator the one who commercializes new products, new production techniques, or even new forms of business organization. The entrepreneur is a risk bearer. The entrepreneur in a market system has no guarantee of profit. The reward for the entrepreneur's time, efforts, and abilities may be profits or losses. The entrepreneur risks not only his or her invested funds but those of associates and...

Legal Cartel Theory

The regulation of potentially competitive industries has produced the legal cartel theory of regulation. In place of socially minded officials forcing regulation on natural monopolies to protect consumers, holders of this view see practical politicians as supplying regulation to local, regional, and national firms that fear the impact of competition on their profits or even on their long-term survival. These firms desire regulation because it yields a legal monopoly that can guarantee a profit....

Potential Negative Effects of Advertising

Not all the effects of advertising are positive, of course. Much advertising is designed simply to persuade consumers that is, to alter their preferences in favour of the advertiser's product. A television commercial that indicates that a popular personality drinks a particular brand of soft drink and, therefore, that you should too conveys little or no information to consumers about price or quality. In addition, advertising is sometimes based on misleading and extravagant claims that confuse...

Three The Monopolist Sets Prices in the Elastic Region of Demand

The total-revenue test for price elasticity of demand is the basis for our third implication. Recall from Chapter 6 that the total-revenue test reveals that when demand is elastic, a decline in price will increase total revenue. Similarly, when demand is inelastic, a decline in price will reduce total revenue. Beginning at the top of demand curve D in Figure 10- a , observe that as the price declines from 172 to approximately 82, total revenue increases and marginal revenue, therefore, is...

Exploiting University and Government Scientific Research

Only a small percentage of R amp D spending goes to basic scientific research. The reason that percentage is so small is that scientific principles, as such, cannot be patented, nor do they usually have immediate commercial uses. Yet new scientific knowledge is highly important to technological advance. For that reason, entrepreneurs study the scientific output of university and government laboratories to identify discoveries with commercial applicability. Government and university labs have...

Charter Summary

Technological advance is evidenced by new and improved goods and services and new and improved production or distribution processes. In economists' models, technological advance occurs only in the very long run. 2. Invention is the discovery of a product or process through the use of imagination, ingenuity, and experimentation. Innovation is the first successful commercial introduction of a new product, the first use of a new method, or the creation of a new form of business enterprise....

Appendix Study Questions

What information is embodied in a budget line What shifts occur in the budget line when money income a increases and b decreases What shifts occur in the budget line when the price of the product shown on the vertical axis a increases and b decreases 2. What information is contained in an indifference curve Why are such curves a downward sloping and b convex from the origin Why does total utility increase as the consumer moves to indifference curves farther from the origin Why can't...

Pure Competition And Consumer Surplus

Pure competition provides consumers with the largest utility surplus that is consistent with keeping the product in production. In almost all markets, consumers collectively obtain more utility total satisfaction from their purchases than the amount of their expenditures product price x quantity . This surplus of utility arises because some consumers are willing to pay more than the equilibrium price but need not do so. Consider the market for oranges depicted in the figure below. The demand...

Present Choices And Future Possibilities

An economy's current position on its production possibilities curve is a basic determinant of the future location of that curve. Let's designate the two axes of the production possibilities curve as goods for the future and goods for the resent, as in Figure 2-5. Goods for the future are such things as capital goods, research and education, and preventive medicine. They increase the quantity and quality of property resources, enlarge the stock of technological information, and improve the...

Fair Return Price P ATC

It is possible for the socially optimal price, Pr, that equals marginal cost to be so low that average total costs are not covered, as is the case in Figure 10-9. The result is a loss for the firm. The reason lies in the basic character of our firm. Because it is required to meet the heaviest peak demands both daily and seasonally for natural gas, it has substantial excess production capacity when demand is relatively normal. Its high level of investment in production facilities and economies...

Pure Competition

Does a pure competitor have a strong incentive and strong ability to undertake R amp D On the positive side, strong competition provides a reason for these firms to innovate competitive firms tend to be less complacent than monopolists. If a pure competitor does not seize the initiative, one or more rivals may introduce a new product or cost-reducing production technique that could drive the firm from the market. As a matter of short-term profit and long-term survival, the pure competitor is...

Economies Of Scale Once Again

Where there are extensive economies of scale, market demand may not be sufficient to support a large number of competing firms, each producing at minimum efficient scale. In such cases, an industry of one or two firms would have a lower average total cost than would the same industry made up of numerous competitive firms. At the extreme, only a single firm a natural monopoly might be able to achieve the lowest long-run average total cost. Some firms relating to new information technologies, for...

Economic Profit or Pure Profit

Obviously, then, economists use the term profit differently from the way accountants use it. To the accountant, profit is the firm's total revenue less its explicit costs or accounting costs . To the economist, economic profit is total revenue less economic costs explicit and implicit costs, the latter including a normal profit to the entrepreneur . So, when an economist says a certain firm is earning only enough revenue to cover its costs, this means it is meeting all explicit and implicit...

Oligopoly In The Beer Industry

The beer industry was once populated by dozen of firms and an even larger number of brands. It now is an oligopoly dominated by a handful of producers. The brewing industry has undergone profound changes since World War II that have increased the degree of concentration in the industry. In 1945 more than 60 independent brewing companies existed in Canada. By 1967 there were 18, and by 1984 only 11. While the three largest brewers sold only 19 percent of the nation's beer in 1947, the Big Three...

Four Market ModeLs

A market structure in which a very large number of firms produce a standardized product. market structure in which one firm is the sole seller of a product or service. A market structure in which a relatively large number of sellers produce differentiated products. market structure in which a few large firms produce homogeneous or differentiated products. The market models of pure monopoly, monopolistic competition, and oligopoly considered as a group. Economists group industries into four...

Economic Rationale

What is the economic rationale for the law of increasing opportunity costs Why does the sacrifice of robots increase as we produce more pizzas The answer is that resources are not com letely ada table to alternative uses. Many resources are better at producing one good than at producing others. Fertile farmland is highly suited to producing the ingredients needed to make pizzas, while land rich in mineral deposits is highly suited to producing the materials needed to make robots. As we step up...

Long Run Supply for a Decreasing Cost Industry

In a decreasing-cost industry, a firm experiences lower costs as the industry expands. The personal computer industry is an example. As demand for personal computers increased, new manufacturers of computers entered the industry and greatly increased the resource demand for the components used to build them for example, memory chips, hard drives, monitors, and operating software . The expanded production of those components enabled the producers of those items to achieve substantial economies...

Guiding Function Of Prices

For instance, assume that consumers decide they want more fruit juice and less milk than the economy currently provides. Those changes in consumer tastes will be communicated to producers through an increase chapter four an overview of the market system and the canadian economy guiding Function of prices The ability of price changes to bring about changes in the quantities of products and resources demanded and supplied. The hypothesis that the creation of new...

Legal Forms of Businesses

The business population is extremely diverse, ranging from giant corporations such as Nortel, with sales in 2000 of U.S. 0 billion and more than 94,500 employees worldwide, to neighbourhood specialty shops and mom-and-pop groceries with one or two employees and sales of only 200 to 00 per day. There are three major legal forms of businesses. 1. A sole proprietorship is a business owned and operated by one person. Usually, the proprietor the owner personally supervises its operation. 2. The...

Supply Curve Shifts

In Chapter 8 we saw that changes in such factors as the prices of variable inputs or in technology will shift the marginal-cost or short-run supply curve to a new location. All else being equal, a wage increase, for example, would shift the supply curve in Figure 9-6 upward as viewed from the horizontal axis leftward as viewed from the vertical axis , constituting a decrease in supply. Similarly, technological progress that increases the productivity of labour would shift the marginal-cost or...

Ownership or Control of Essential Resources

A monopolist can use private property as an obstacle to potential rivals. For example, a firm that owns or controls a resource essential to the production process can prohibit the entry of rival firms. At one time the International Nickel Company of Canada now called Inco controlled 90 percent of the world's known nickel reserves. A municipal sand and gravel firm may own all the nearby deposits of sand and gravel. And, it is very difficult for new sports leagues to be created because existing...

Transportation Technology

High transportation costs are a barrier to any type of trade, particularly among traders who Part One An Intrgduction to Economics and the Economy are distant from one another. But improvements in transportation have shrunk the globe and have fostered world trade. Airplanes now transport low-weight, high-value items such as diamonds and semiconductors swiftly from one nation to another. We now routinely transport oil in massive tankers, significantly lowering the cost of transportation per...

Role In Promoting Progress

Adjusting to changes is one thing initiating desirable changes is another. How does the market system promote technological improvements and capital accumulation two changes that lead to greater productivity and a higher level of material well-being for society Technological Advance The market system provides a strong incentive for technological advance and enables better products and processes to brush aside inferior ones. An entrepreneur or firm that introduces a popular new product will gain...

The Invisible Hand Revisited

Finally, the highly efficient allocation of resources that a purely competitive economy promotes comes about because businesses and resource suppliers seek to further their self-interest. The invisible hand Chapter 4 is at work in a competitive market system. The competitive system not only maximizes profits for individual producers but creates a pattern of resource allocation that maximizes consumer satisfaction. The invisible hand thus organizes the private interests of producers in a way...

Entry Eliminates Economic Profits

Let's upset the long-run equilibrium in Figure 9-8 and see what happens. Suppose a change in consumer tastes increases product demand from D1 to D2. Price will rise to 60, as determined at the intersection of D2 and S1, and the firm's marginal-revenue curve will shift upward to 60. This 60 price exceeds the firm's average total cost of 50 at output 100, creating an economic profit of 10 per unit. This economic profit will lure new firms into the industry. Some entrants will be newly created...

A B C D E F

Radios in thousands 10 8 6 4 2 0 Chemicals in tonnes 0 4 8 12 16 20 a. Are comparative-cost conditions such that the two areas should specialize If so, what product should each produce b. What is the total gain in radio and chemical output that results from this specialization c. What are the limits of the terms of trade Suppose actual terms of trade are 1 unit of radios for 1V2 units of chemicals and that 4 units of radios are exchanged for 6 units of chemicals. What are the gains from...

O O C5

0 Goods for the present 0 Goods for the present Part One An Introduction to Economics and the Economy of capital goods, Zorn is choosing to make larger current additions to its national factory to invest more of its current output than Alta. The payoff from this choice for Zorn is more rapid growth greater future production capacity. The opportunity cost is fewer consumer goods in the present for Zorn to enjoy. See Global Perspective 2.1. Is Zorn's choice thus better than Alta's That, we cannot...

The Verson Stamping Machine

In 1996 Verson a U.S. firm located in Chicago introduced a 15-metre-tall metal-stamping machine that is the size of a house and weighs as much as 12 locomotives. This 0 million machine, which cuts and sculpts raw sheets of steel into automobile hoods and fenders, enables automakers to make new parts in just five minutes compared with eight hours for older stamping presses. A single machine is designed to make five million auto parts a year. So, to achieve the cost saving from this machine, an...

Quasilinear Utility

An indifference map is a set of indifference curves. Curves farther from the origin indicate higher levels of total utility. Thus, any combination of products A and B represented by a point on I4 has greater total utility than any combination of A and B represented by a point on I3, I2, and I1. of indifference curves or an indifference map, as shown in Figure A7- . Each curve reflects a different level of total utility. Specifically, each curve to the right of our original curve labelled I in...

In Economics What Is A Collection Of Specific Economic Units Treated As If They Were One Unit

More economic security allows less economic freedom, society must assess the tradeoffs and decide on the optimal best balance between them. Economists use the scientific method to establish theories, laws, and principles. Economic theories laws, principles, or models are generalizations relating to the economic behaviour of individuals and institutions good theories are grounded in facts. behaviour and the economy policy economics involves using the theories to fix economic problems or promote...

StuDy quEBtioNs

Why does a demand curve slope downward What are the determinants of demand What happens to the demand curve when each of these determinants changes Distinguish between a change in demand and a change in the quantity demanded, noting the cause s of each. 2. KEY QUESTION What effect will each of the following have on the demand for product B a. Product B becomes more fashionable. b. The price of substitute product C falls. c. Income declines and product B is an...

Sole Proprietorships

Sole proprietorships are very numerous because they are easy to setup and organize there is virtually no red tape or legal expense. The proprietor is the boss and has substantial freedom of action. Because the proprietor's profit income depends on the enterprise's success, strong incentive exists to manage the business efficiently. Sole proprietorships also have several disadvantages. With rare exceptions, the financial resources of a sole proprietorship are insufficient to permit the firm to...

Chapter Summary

Economics is grounded on two basic facts a wants are virtually unlimited b resources are scarce. 2. Resources may be classified as property resources raw materials and capital or as human resources labour and entrepreneurial ability. These resources constitute the factors of production. 3. Economics is concerned with the problem of using scarce resources to produce the goods and services that satisfy the material wants of society. Both full employment and the efficient use of available...

Terms And Concepts

Aggregate, p. 11 economic perspective, p. 4 economics, p. 3 fallacy of composition, p. 13 generalizations, p. 8 macroeconomics, p. 11 marginal analysis, p. 5 microeconomics, p. 11 normative economics, p. 12 other-things-equal assumption, p. 8 policy economics, p. 9 positive economics, p. 12 fallacy, p. 14 principles, p. 7 scientific method, p. 6 theoretical economics, p. 7 tradeoffs, p. 10 1. KEY QUESTION Use the economic perspective to explain why someone who is normally a light eater at a...

The CiRcuLAr Flow Revisited

In Figure 4-2 we integrate government into the circular flow model first shown in Figure 2-6. Here flows 1 through 4 are the same as the corresponding flows in that figure. Flows 1 and 2 show business expenditures for the resources provided by households. These expenditures are costs to businesses but represent wage, rent, interest, and profit income to households. Flows and 4 show household expenditures for the goods and services produced by businesses. Now consider what happens when we add...

Elimination Of The Minus Sign

We know from the downsloping demand curve shown in earlier chapters that price and quantity demanded are inversely related. Thus, the price elasticity coefficient of demand Ed will always be a negative number. As an example, if price declines, then quantity demanded will increase, which means that the numerator in our formula will be positive and the denominator negative, yielding a negative Ed. For an increase in price, the denominator will be positive but the numerator will be negative, again...