ELASTICITY & APPLICATIONS (CHAPTER 5)
Price Elasticity of Demand: Percentage change in quantity demanded divided
by percentage change in a goods price.
Equivalently, it is the percentage change in quantity demanded in response to a
Markets & Welfare: Applications
Example 1: Consider the individual demand for gasoline for a motorist
given by P= 10- Q where P: price of gasoline per gallon and Q: quantity.
Suppose gasoline price rises from $2 to $3. Compute the decline in her
GAINS FROM TRADE (CHAPTER 3)
Trade can make everyone better off (Principle # 5)
Example 1: Kidney exchange
Example 2: Barter economy [e.g., farmer (who produces only food) vs. rancher (who
produces only meat)]
Example 3: Need a birthday cake. You can make
Public Goods & Common Resources (Chapter 11)
Many goods, such as clothing, are produced and sold by private companies,
but others are not. National defense, for instance, is provided by the
government. Why do private companies produce and sell clothing bu
Efficiency of Markets (Chapter 7)
So far, we studied how markets allocate scarce resources but we did not ask
whether market allocations are desirable.
Q: What is the right price of a good? Alternatively, what price level
makes both sides of the market as
Development of the Economic Theory of Value
What determines the value of a good?
But, how do you define value?
-18th century: importance, essentiality, godliness
Water is very valuable. So is diamond. But then why is
MARKET FAILURE: EXTERNALITIES
Markets may sometimes fail to allocate resources efficiently. One example is
when market outcomes concern the well-being of those other than the buyers
and the sellers of the good.
An externality arises when a pe