Margins Study Assistant

Chapter 1

Welcome to Economics!

Summary

Microeconomics and macroeconomics are two different perspectives on the economy. Economics seeks to solve the problem of scarcity, which is when human wants for goods and services exceed the available supply. Division and specialization of labor only work when individuals can purchase what they do not produce in markets. A modern economy displays a division of labor, in which people earn income by specializing in what they produce and then use that income to purchase the products they need or want.

Key terms

economics: the study of how humans make choices under conditions of scarcity
specialization: when workers or firms focus on particular tasks for which they are well-suited within the overall production process
microeconomics: the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms
macroeconomics: the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance
division of labor: the way in which different workers divide required tasks to produce a good or service
market: interaction between potential buyers and sellers; a combination of demand and supply
scarcity: when human wants for goods and services exceed the available supply
command economy: an economy where economic decisions are passed down from government authority and where the government owns the resources

Chapter 2

Choice in a World of Scarcity

Read chapter 2 in the book

Summary

The budget constraint, which is the frontier of the opportunity set, illustrates the range of available choices. The relative price of the choices determines the slope of the budget constraint. Choices beyond the budget constraint are not affordable Opportunity cost measures cost by what we forgo in exchange.

Key terms

budget constraint: all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set
opportunity set: all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income
opportunity cost: measures cost by what we give up/forfeit in exchange; opportunity cost measures the value of the forgone alternative
productive efficiency: when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)
positive statement: statement which describes the world as it is
comparative advantage: when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production
law of diminishing marginal utility: as we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units
law of diminishing returns: as we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline

Chapter 3

Demand and Supply

Read chapter 3 in the book

Summary

The equilibrium price and equilibrium quantity occur where the supply and demand curves cross. The equilibrium occurs where the quantity demanded is equal to the quantity supplied. The law of demand states that a higher price typically leads to a lower quantity demanded The law of supply says that a higher price typically leads to a higher quantity supplied

Key terms

demand: the relationship between price and the quantity demanded of a certain good or service
supply: the relationship between price and the quantity supplied of a certain good or service
equilibrium: the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages…
law of demand: the common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other…
law of supply: the common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant
equilibrium quantity: the quantity at which quantity demanded and quantity supplied are equal for a certain price level
quantity demanded: the total number of units of a good or service consumers are willing to purchase at a given price
quantity supplied: the total number of units of a good or service producers are willing to sell at a given price

Chapter 4

Labor and Financial Markets

Read chapter 4 in the book

Summary

In the demand and supply analysis of financial markets, the “price” is the rate of return or the interest rate received. In the labor market, households are on the supply side of the market and firms are on the demand side. In the market for financial capital, households and firms can be on either side of the market: they are suppliers of financial capital when they save or make financial investments, and demanders of financial capital… In the demand and supply analysis of labor markets, we can measure the price by the annual salary or hourly wage received.

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 hourly rate
usury laws: laws that impose an upper limit on the interest rate that lenders can charge

Chapter 5

Elasticity

Read chapter 5 in the book

Summary

An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied. Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. A unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied Infinite or perfect elasticity refers to the extreme case where either the quantity demanded or supplied changes by an infinite amount in response to any change in price at all.

Key terms

elasticity: an economics concept that measures responsiveness of one variable to changes in another variable
elastic demand: when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
inelastic demand: when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice…
unitary elasticity: when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied
price elasticity: the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied
inelastic demand or supply curve: one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied
cross-price elasticity of demand: the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B

Chapter 6

Consumer Choices

Read chapter 6 in the book

Summary

However, the additional utility people receive from each unit of greater consumption tends to decline in a pattern of diminishing marginal utility In general, greater consumption of a good brings higher total utility. You can add up total utility of each choice on the budget line and choose the highest total. You can select a starting point at random and compare the marginal utility gains and losses of moving to neighboring points—and thus eventually seek out the preferred choice.

Key terms

diminishing marginal utility: the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit
marginal utility: the additional utility provided by one additional unit of consumption
total utility: satisfaction derived from consumer choices
consumer equilibrium: point on the budget line where the consumer gets the most satisfaction; this occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities
fungible: the idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual
income effect: a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution…
budget constraint (or budget line): shows the possible combinations of two goods that are affordable given a consumer’s limited income
behavioral economics: a branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean…

Chapter 7

Production, Costs, and Industry Structure

Read chapter 7 in the book

Summary

While accounting profit considers only explicit costs, economic profit considers both explicit and implicit costs Production is the process a firm uses to transform inputs (e.g., labor, capital, raw materials, etc.) into outputs. Thus, in the short run the only way to change output is to change the variable inputs (e.g., labor). Marginal product is the additional output a firm obtains by employing more labor in production.

Key terms

production: the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs
short run: period of time during which at least one or more of the firm’s inputs is fixed
firm: an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs
implicit costs: opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned
diminishing marginal productivity: general rule that as a firm employs more labor, eventually the amount of additional output produced declines
explicit costs: out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials
fixed inputs: factors of production that can’t be easily increased or decreased in a short period of time
variable inputs: factors of production that a firm can easily increase or decrease in a short period of time

Chapter 8

Perfect Competition

Read chapter 8 in the book

Summary

Perfect competition means that there are many sellers, there is easy entry and exiting of firms, products are identical from one seller to another, and sellers are price takers A perfectly competitive firm is a price taker, which means that it must accept the equilibrium price at which it sells goods. In a perfectly competitive market there are thousands of sellers, easy entry, and identical products. Long-run equilibrium in a perfectly competitive industry occurs after all firms have entered and exited the industry and seller profits are driven to zero

Key terms

perfect competition: each firm faces many competitors that sell identical products
perfectly competitive firm: a price taker, which means that it must accept the equilibrium price at which it sells goods
short-run production period: when firms are producing with some fixed inputs
exit: the long-run process of firms reducing production and shutting down in response to industry losses
long-run equilibrium: where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC
price taker: a firm in a perfectly competitive market that must take the prevailing market price as given
entry: the long-run process of firms entering an industry in response to industry profits
perfectly competitive market there: thousands of sellers, easy entry, and identical products

Chapter 9

Monopoly

Read chapter 9 in the book

Summary

These barriers include: economies of scale that lead to natural monopoly; control of a physical resource; legal restrictions on competition; patent, trademark and copyright protection; and practices to intimidate the… The laws that protect intellectual property include patents, copyrights, trademarks, and trade secrets. A natural monopoly arises when economies of scale persist over a large enough range of output that if one firm supplies the entire market, no other firm can enter without facing a cost disadvantage Barriers to entry prevent or discourage competitors from entering the market.

Key terms

monopoly: a situation in which one firm produces all of the output in a market
copyright: a form of legal protection to prevent copying, for commercial purposes, original works of authorship, including books and music
intellectual property: the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions
natural monopoly: economic conditions in the industry, for example, economies of scale or control of a critical resource, that limit effective competition
patent: a government rule that gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time
barriers to entry: the legal, technological, or market forces that may discourage or prevent potential competitors from entering a market
trademark: an identifying symbol or name for a particular good and can only be used by the firm that registered that trademark

Chapter 10

Monopolistic Competition and Oligopoly

Read chapter 10 in the book

Summary

Monopolistic competition refers to a market where many firms sell differentiated products. A profit-maximizing monopolistic competitor will seek out the quantity where marginal revenue is equal to marginal cost. Differentiated products can arise from characteristics of the good or service, location from which the firm sells the product, intangible aspects of the product, and perceptions of the product The perceived demand curve for a monopolistically competitive firm is downward-sloping, which shows that it is a price maker and chooses a combination of price and quantity.

Key terms

oligopoly: when a few large firms have all or most of the sales in an industry
monopolistic competition: many firms competing to sell similar but differentiated products
monopolistically competitive industry: earning economic profits, the industry will attract entry until profits are driven down to zero in the long run
monopolistically competitive firm: downward-sloping, which shows that it is a price maker and chooses a combination of price and quantity
monopolistic competitor: more elastic than the perceived demand curve for a monopolist, because the monopolistic competitor has direct competition, unlike the pure monopolist
differentiated product: a product that consumers perceive as distinctive in some way
product differentiation: any action that firms do to make consumers think their products are different from their competitors'

Chapter 11

Monopoly and Antitrust Policy

Read chapter 11 in the book

Summary

Antitrust laws seek to ensure active competition in markets, sometimes by preventing large firms from forming through mergers and acquisitions, sometimes by regulating business practices that might restrict… A four-firm concentration ratio is one way of measuring the extent of competition in a market. A corporate merger involves two private firms joining together. An acquisition refers to one firm buying another firm.

Key terms

concentration ratio: an early tool to measure the degree of monopoly power in an industry; measures what share of the total sales in the industry are accounted for by the largest firms, typically the…
four-firm concentration ratio: the percentage of the total sales in the industry that are accounted for by the largest four firms
antitrust laws: laws that give government the power to block certain mergers, and even in some cases to break up large firms into smaller ones
Herfindahl-Hirschman Index (HHI): approach to measuring market concentration by adding the square of the market share of each firm in the industry
merger: when two formerly separate firms combine to become a single firm
market share: the percentage of total sales in the market
acquisition: when one firm purchases another
tying sales: a situation where a customer is allowed to buy one product only if the customer also buys another product

Chapter 12

Environmental Protection and Negative Externalities

Read chapter 12 in the book

Summary

An externality, which is sometimes also called a spillover, can have a negative or a positive impact on the third party. If those parties imposing a negative externality on others had to account for the broader social cost of their behavior, they would have an incentive to reduce the production of whatever is causing the negative… In the case of a positive externality, the third party obtains benefits from the exchange between a buyer and a seller, but they are not paying for these benefits. If the parties generating benefits to others would somehow receive compensation for these external benefits, they would have an incentive to increase production of whatever is causing the positive externality.

Key terms

externality: a market exchange that affects a third party who is outside or “external” to the exchange; sometimes called a “spillover”
positive externality: a situation where a third party, outside the transaction, benefits from a market transaction by others
negative externality: a situation where a third party, outside the transaction, suffers from a market transaction by others
market failure: When the market on its own does not allocate resources efficiently in a way that balances social costs and benefits; externalities are one example of a market failure
additional external cost: additional costs incurred by third parties outside the production process when a unit of output is produced
property rights: the legal rights of ownership on which others are not allowed to infringe without paying compensation
command-and-control regulation: laws that specify allowable quantities of pollution and that also may detail which pollution-control technologies one must use

Chapter 13

Positive Externalities and Public Goods

Read chapter 13 in the book

Summary

New technology often has positive externalities; that is, there are often spillovers from the invention of new technology that benefit firms other than the innovator. If inventors could receive a greater share of the broader social benefits for their work, they would have a greater incentive to seek out new inventions Competition creates pressure to innovate. However, if one can easily copy new inventions, then the original inventor loses the incentive to invest further in research and development.

Key terms

public good: good that is nonexcludable and non-rival, and thus is difficult for market producers to sell to individual consumers
positive externalities: beneficial spillovers to a third party or parties
social benefits: the sum of private benefits and external benefits
nonexcludable: when it is costly or impossible to exclude someone from using the good, and thus hard to charge for it
external benefits (or positive externalities): beneficial spillovers to a third party of parties, who did not purchase the good or service that provided the externalities
free rider: those who want others to pay for the public good and then plan to use the good themselves; if many people act as free riders, the public good may never be provided
intellectual property: the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions
private benefits: the benefits a person who consumes a good or service receives, or a new product's benefits or process that a company invents that the company captures

Chapter 14

Labor Markets and Income

Read chapter 14 in the book

Summary

For a firm which is not perfectly competitive, the appropriate concept is the marginal revenue product, which we define as the marginal product of labor multiplied by the firm’s marginal revenue. Profit maximizing firms employ labor up to the point where the market wage is equal to the firm’s demand for labor. A monopsony is the sole employer in a labor market. The monopsony can pay any wage it chooses, subject to the market supply of labor.

Key terms

monopsony: a labor market where there is only one employer
point where the market wage: equal to the firm’s demand for labor
discrimination: actions based on the belief that members of a certain group or groups are in some way inferior solely because of a factor such as race, gender, or religion
affirmative action: active efforts by government or businesses that give special rights to minorities in hiring, promotion, or access to education to make up for past discrimination
perfectly competitive labor market: a labor market where neither suppliers of labor nor demanders of labor have any market power; thus, an employer can hire all the workers they would like at the going market wage
first rule of labor markets: an employer will never pay a worker more than the value of the worker's marginal productivity to the firm
bilateral monopoly: a labor market with a monopsony on the demand side and a union on the supply side

Chapter 15

Poverty and Economic Inequality

Read chapter 15 in the book

Summary

The poverty rate is what percentage of the population lives below the poverty line, which the amount of income that it takes to purchase the necessities of life determines. Poverty and income inequality are not the same thing. A poverty trap occurs when government-support payments decline as the recipients earn more income. Income inequality refers to the disparity between those with higher and lower incomes.

Key terms

poverty: the situation of being below a certain level of income one needs for a basic standard of living
poverty trap: antipoverty programs set up so that government benefits decline substantially as people earn more income—as a result, working provides little financial gain
income inequality: when one group receives a disproportionate share of total income or wealth than others
poverty line: the specific amount of income one requires for a basic standard of living
income: a flow of money received, often measured on a monthly or an annual basis
poverty rate: percentage of the population living below the poverty line
Lorenz curve: a graph that compares the cumulative income actually received to a perfectly equal distribution of income; it shows the share of population on the horizontal axis and the…
Medicaid: a federal-state joint program enacted in 1965 that provides medical insurance for certain (not all) people with a low-income, including those near the poverty line as well as…

Chapter 16

Information, Risk, and Insurance

Read chapter 16 in the book

Summary

In goods markets, buyers facing imperfect information about products may depend upon money-back guarantees, warranties, service contracts, and reputation. In capital markets, lenders facing imperfect information about borrowers may require detailed loan applications and credit checks, cosigners, and collateral In labor markets, employers facing imperfect information about potential employees may turn to resumes, recommendations, occupational licenses for certain jobs, and employment for trial periods. Many make economic transactions in a situation of imperfect information, where either the buyer, the seller, or both are less than 100% certain about the qualities of what they are buying or selling.

Key terms

insurance: method of protecting a person from financial loss, whereby policy holders make regular payments to an insurance entity; the insurance firm then remunerates a group member who…
imperfect information: a situation where either the buyer or the seller, or both, are uncertain about the qualities of what they are buying and selling
collateral: something valuable—often property or equipment—that a lender would have a right to seize and sell if the buyer does not repay the loan
cosigner: another person or firm who legally pledges to repay some or all of the money on a loan if the original borrower does not
occupational license: licenses issued by government agencies, which indicate that a worker has completed a certain type of education or passed a certain test
service contract: the buyer pays an extra amount and the seller agrees to fix anything specified in the contract that goes wrong for a set time period
money-back guarantee: a promise that the seller will refund the buyer’s money under certain conditions
quality of products: highly imperfect, it may be difficult for a market to exist

Chapter 17

Financial Markets

Read chapter 17 in the book

Summary

Corporate bonds are issued by firms; municipal bonds are issued by cities, state bonds by U.S. States, and Treasury bonds by the federal government through the U.S. A company's stock is divided into shares. We call a company’s first stock sale to the public the initial public offering (IPO).

Key terms

venture capital: financial investments in new companies that are still relatively small in size, but that have potential to grow substantially
bond: a financial contract through which a borrower like a corporation, a city or state, or the federal government agrees to repay the amount that it borrowed and also a rate of…
Treasury bond: a bond issued by the federal government through the U.S. Department of the Treasury
initial public offering (IPO): the first sale of shares of stock by a firm to outside investors
shares: a firm's stock, divided into individual portions
stock: a specific firm's claim on partial ownership
municipal bonds: a bond issued by cities that wish to borrow
corporate bond: a bond issued by firms that wish to borrow

Chapter 18

Public Economy

Read chapter 18 in the book

Summary

Logrolling refers to a situation in which two or more legislators agree to vote for each other’s legislation, which can then encourage pork-barrel spending in many districts The theory of rational ignorance says voters will recognize that their single vote is extremely unlikely to influence the outcome of an election. We define pork--barrel spending as legislation whose benefits are concentrated on a single district while the costs are spread widely over the country. As a consequence, they will choose to remain uninformed about issues and not vote.

Key terms

rational ignorance: the theory that rational people will not vote if the costs of becoming informed and voting are too high or because they know their vote will not be decisive in the election
logrolling: the situation in which groups of legislators all agree to vote for a package of otherwise unrelated laws that they individually favor
pork-barrel spending: spending that benefits mainly a single political district
single district while the costs: spread widely over the country
special interest groups: groups that are small in number relative to the nation, but well organized and thus exert a disproportionate effect on political outcomes
median voter theory: theory that politicians will try to match policies to what pleases the median voter preferences
voting cycle: the situation in which a majority prefers A over B, B over C, and C over A

Chapter 19

International Trade

Read chapter 19 in the book

Summary

A country has an absolute advantage in those products in which it has a productivity edge over other countries; it can produce more of a product. Countries that specialize based on comparative advantage gain from trade If other countries specialize in the area of their comparative advantage as well and trade, the highly productive country is able to benefit from a lower opportunity cost of production in other countries A country has a comparative advantage when it can produce a good at a lower cost in terms of other goods.

Key terms

absolute advantage: when one country has more resources, more productive resources, or a natural endowment to produce a good compared to another country; when a country can produce more of a good…
gain from trade: a country that can consume more than it can produce as a result of specialization and trade
highly productive country: able to benefit from a lower opportunity cost of production in other countries
value chain: how a good is produced in stages
splitting up the value chain: many of the different stages of producing a good happen in different geographic locations
intra-industry trade: international trade of goods within the same industry
tariffs: taxes that governments place on imported goods

Chapter 20

Globalization and Protectionism

Read chapter 20 in the book

Summary

There are three tools for restricting the flow of trade: tariffs, import quotas, and nontariff barriers. When a country places limitations on imports from abroad, regardless of whether it uses tariffs, quotas, or nontariff barriers, it is said to be practicing protectionism. Protectionism will raise the price of the protected good in the domestic market, which causes domestic consumers to pay more, but domestic producers to earn more In thinking about labor practices in low-income countries, it is useful to draw a line between what is unpleasant to think about and what is morally objectionable.

Key terms

protectionism: government policies to reduce or block imports
line between what: unpleasant to think about and what is morally objectionable
nontariff barriers: ways a nation can draw up rules, regulations, inspections, and paperwork to make it more costly or difficult to import products
import quotas: numerical limits on the quantity of products that a country can import
national interest argument: the argument that there are compelling national interests against depending on key imports from other nations
anti-dumping laws: laws that block imports sold below the cost of production and impose tariffs that would increase the price of these imports to reflect their cost of production
common market: economic agreement between countries to allow free trade in goods, services, labor, and financial capital between members while having a common external trade policy
disruptive market change: innovative new product or production technology which disrupts the status quo in a market, leading the innovators to earn more income and profits and the other firms to lose…