11 Public Goods and
Goods can be grouped into four categories according to two
characteristics: (1) A good is excludable if people can be
prevented from using it. (2) A good is rival in consumption
if one persons use of the good dimin
Nash Equilibrium: a vector of strategies such that given other players strategies, no player has
an incentive to deviate.
Dominant Strategy equilibrium: an equilibrium in which one action is strictly better than any
other regardless of how the other playe
Consumers, Producers, and
the Efficiency of Markets
Buyers and sellers receive benefits from taking part and
interacting in markets. However, economists wish to
know whether the equilibrium price and quantity
maximize the total welfare of buyers and
Elasticity and its Application
It is not difficult to imagine that the slopes of the demand curves of
different goods and services differ. Also, the slopes of the supply
curves of different goods and services could differ as well.
Elasticity is a me
Imperfect competition, i.e., those market structures that
fall between perfect competition and pure monopoly.
Imperfect competition includes industries in which
firms have competitors but do not face as much
competition to make them price
4 The Market Forces of
Supply and Demand
A market is a group of buyers and sellers of a particular
good or service. Economists use the model of supply
and demand to analyze the competitive market.
A competitive market is a market in which there
An externality is the uncompensated impact of one persons
actions on the well-being of a bystander. It is one of the
main causes of market failure (together with asymmetric
information and public goods).
A negative (positive) external
9 Application: International
We have already seen the benefits of exchange or trade.
In this chapter we will look at the welfare implication
s of international trade.
Lets examine how free trad
Firms in Competitive
Lets now examine the behavior of competitive firms. Recall
that a market is competitive if each buyer and seller is so
small (insignificant) compared to the size of the market and
therefore has little ability to influen
Supply, Demand and
We now look at policy and their effect using the tools of
supply and demand. Specifically, we shall look at policies
that directly control prices, and the impact of taxes.
In a free, unregulated market system,
The Costs of Production
We shall now move to study production and firms. Specificall
y, in this chapter we will study the link between a firms pr
oduction process and its total costs; the shape of a typical
firms cost curves including its average a
The Great Depression
1. Spending Hypothesis (IS Shock)
a. Stock Market Crash This led to reduced net worth and future
expected income. This meant that people spent less. C fell.
b. Reduced I 1920s people overbuilt houses and in 1930s stricter