2. The market for lemons
Consider a market in which there are many potential
buyers and sellers of used cars. Each potential seller has
one car, which is either of high quality (a plum) or low
quality (a lemon). A seller with a low—quality car is willing
9. Income and substitution effects “ -
Hubert and Kate Juarez live in New York City and enjoy going out to fancy restaurants for dinner and to diners for breal-cfast. On the followmg
diagram, the purple curves F3 and I: represent two of their Indifference
2. Individual demand and consumer surplus
Consider the market for yachts. The market price of each yacht is $180,000, and each buyer demands no more than one yacht.
Suppose that Yakoy is the only consumer in the yacht market. His willingness to payfor a y
7. Producer surplus for an individual and a market
Suppose the market for pizza is a perfectly competitive marketithat is, sellers take the market price as given. Poornima owns a restaurant
where she sells pizza. The followmg graph shows Poornirna's weekl
9. Market efficiency and market failure
Suppose that the following graph shows a free market equilibrium with GE as the equilibrium quantity.
9 _ _ _ _ _ _ _ _ _ .+
For an output level above 0 , the v
5. Profit maximization and shutting down in the short run
Suppose that the market for polos is a competitive market. The following graph shows the daily cost curves of a ﬁrm operating in this market.
PRICE (Dollars perpolo)
B. Total economic surplus
The following diagram shows supply and demand in the market for smart phones.
Use the black polnt (plus symbol) to lndltate the equlﬁbrlun'i prlte and ouantlty ofsmart phones. Then use the green point (trlangle symboﬂ to ﬁll the
B. Total economic surplus
The following diagram shows supply and demand in the market for Ellu-ray players.
Use the bieck point (plus symboi) to indicate the equilibrium price antir quantity of Biu-ray piayers. Then use the green point (triangle symbci) t
11. The backward-bending labor supply curve
Hilary has 80 hours per week to devote to working or to leisure. She is paid an hourly wage and can work at her job as many hours a week as
The following graph illustrates Hilary's weekly incomealeisu
2. Deviating from the collusive outcome
Mays and McCovey are beer-breWing companies that operate in a duopoly (two—ﬁrm oligopoly). The daily marginal cost (MC) of producing a can of '5
beer is constant and equals $0.60 per can. Assume that neith
Willingness to pay: measures how much that buyer valuse the good.
Consumer surplus: the amount a buyer is willing to pay for a good minus the amount the buyer
actually pays for it.
-Consumer surplus equals the area above the price and under the demand cur
*Positive Statements are descriptive. They make a claim about how the world is.
*Normative statements are prescriptive. They make a claim about how the world ought to be.
Circular-flow diagram: A visual model of the economy that shows how dollars flow thr
Scarcity: the limited nature of society's resources
Economics: the study of how society manages its scarce resources
Efficiency: (the property of society getting the most it can from its scarce resources). Means that
society is getting the maximum benefit
Economists use the term absolute advantage when comparing the productivity of one person, firm, or
nation to that of another. The producer that requires a smaller quantity of inputs to produce a good is
said to have an absolute advantage in producing that
An economic model is a simplified representation of some aspect of the economy. Because including
every detailed, realistic aspect of an economy would result in something that isnt tractable and
informative, economists use models to learn about the world.