Econ272 Foundations of Economic Analysis Text: An Economic Way of Thinking 4th Edition Table of Contents Chapter 1: An Economic Way of Thinking ........................................................................................................ 7 Economists and Normal People ...................................................................................................................... 7 Some Keys to Understanding the Way Economists Think ............................................................................. 7 The Basic Economic Problem Scarcity, Choice and Cost .............................................................................. 9 Alternative Approaches to the Basic Economic Problem ............................................................................. 11 Economic Systems and the Basic Economic Problem .................................................................................. 12 The Science of Economics: Observation, Theory and Models ..................................................................... 16 A Model of an Economy: The Production Possibility Frontier I .................................................................. 18 A Model of a College Student’s Basic Economic Problem: The Production Possibility Frontier II ............ 21 Saving, Capital and Growth: The Production Possibility Frontier III .......................................................... 22 The Circular Flow Economic Model ............................................................................................................ 23 The Linear Throughput Economic Model .................................................................................................... 26 Chapter 2: Specialization, Exchange and Economic Well Being ................................................................... 27 Specialization, Exchange and Economic Well Being: A Nontechnical Introduction ................................... 27 Absolute and Comparative Advantage ......................................................................................................... 28 Ole and Lars at Frozen Fjord ........................................................................................................................ 29 Harry and Joe at Priest Lake ......................................................................................................................... 33 An International Example of Comparative Advantage, Specialization and Gains from Trade .................... 35 Chapter 3: Demand, Supply and Elasticity ...................................................................................................... 39 Introduction ................................................................................................................................................... 39 The Determinants of Demand and the Determinant of Quantity Demanded ................................................ 39 Demand and Quantity Demanded: A More Technical Discussion ............................................................... 42 A More Abstract Demand Model ................................................................................................................. 45 Modeling Changes in Demand...................................................................................................................... 45 Modeling Changes in Each Determinant of Demand ................................................................................... 47 The Determinants of Supply and the Determinant of Quantity Supplied ..................................................... 49 - 1 - Supply and Quantity Supplied: A More Technical Discussion .................................................................... 50 A More Abstract Supply Curve .................................................................................................................... 51 Modeling Changes in Supply ........................................................................................................................ 52 Modeling Changes in Each Determinant of Supply ..................................................................................... 54 The Supply and Demand Model: Equilibrium and Market Clearing ............................................................ 55 Excess Demand, Excess Supply, and Price Change to Clear a Market ........................................................ 57 Changes in Demand and the Effects on Price an Quantity ........................................................................... 58 Changes in Supply and the Effects on Price and Quantity ........................................................................... 61 Changes in Both Demand and Supply .......................................................................................................... 62 A Theory of Price Ceilings and Shortages .................................................................................................... 64 Some Applications of the Supply and Demand Model with a Price Ceiling ................................................ 66 A Theory of Price Floors and Surpluses ....................................................................................................... 69 A Labor Market Application of a Price Floor ............................................................................................... 71 The Price Elasticity of Demand .................................................................................................................... 71 Price Elasticity of Demand, the Slope of a Demand Curve, and Revenue Rectangles ................................. 75 Other Demand Elasticities ............................................................................................................................ 76 The Price Elasticity of Supply ...................................................................................................................... 77 Chapter 4: Marginal Analysis and a Theory of the Consumer ...................................................................... 80 Introduction ................................................................................................................................................... 80 The Budget Line Model ................................................................................................................................ 80 Representing Price and Budget Changes in the Budget Line Model ............................................................ 82 Representing Consumer Preferences with a Utility Function ....................................................................... 84 Constrained Utility Maximization with the Equimarginal Principle ............................................................ 88 Other Applications of the Equimarginal Principle: Equalizing Bang for the Buck at the Margin ............... 91 Normal and Inferior Goods and the Budget Line Model .............................................................................. 92 The Income-equivalent of a Price Change .................................................................................................... 93 The Budget Line Model, In-kind Transfers and Black Markets ................................................................... 95 The Budget Line Model and the Unanticipated Effect of a Subsidy ............................................................ 97 Deriving an Individual Demand Curve from the Budget Line Model .......................................................... 98 From Individual Demand Curves to the Market Demand Curve .................................................................. 99 Chapter 5: Marginal Analysis and a Model of a Business: Production, Cost, Revenue and Profit .......... 102 Introduction ................................................................................................................................................. 102 The Production Function............................................................................................................................. 102 - 2 - From Production to Cost, Revenue, and Profit ........................................................................................... 105 Graphical Models of Total and Marginal Costs .......................................................................................... 110 Graphical Models of the Average Cost Curves of a Business .................................................................... 113 The Short-run Cost Model of A Business ................................................................................................... 115 Grade Point Averages, Batting Averages, & the Relationship between Average Cost & Marginal Cost .. 116 The Revenue Model of a Business with No Market Pricing Power ........................................................... 117 Combining Cost & Revenue Models of a Business to Model Profit Maximization & Loss Minimization 119 A Model of the Short Run Shutdown Decision .......................................................................................... 122 Long Run Considerations ........................................................................................................................... 124 Chapter 6: Marginal Analysis and a Theory of a Business: Resource Demand ......................................... 125 Introduction ................................................................................................................................................