Taxes pay for public goods and redistribute income. We want to look at them in terms of their effect
on demand, supply and consumer/producer surplus, in this way we can consider the issue of
So far when we have referred to goods and services, we have just assumed that anyone who can pay
for them can have them. This isnt always the case. There are two issues:
1. Using a good/service without pay
This is another simplified use of the PPF (we look at economic growth in detail in macroeconomics).
Our economy is still made up of just 2 goods but if we drop our assumptions about fixed technology
This is a situation where there are few firms in the industry - part way between a monopoly and a
For simplicity we usually assume two firms in the oligopoly (which is called a duopoly).
This is a theoretical model that is not meant to reflect the real world. It does give us a tool for
analysing the real world though, we can use it a marker to compare the competitiveness of a market.
Factor markets are the markets for factors of production Land, Labour, Capital and
The usual rules of demand and supply are used (e.g. higher prices increase the quantity suppli
A monopoly exists when one firm provides a good or service the firm is the industry. This happens
1. There are no close substitutes
2. New firms cannot set up to compete.
The first is self explanatory. However,
A demand curve is a marginal benefit curve, that is, the demand curve shows how much a person is
willing to pay for something. It shows us what price they will pay for one extra unit of something a
Government Intervention in Markets
We can use the concept of producer and consumer surplus to analyse market efficiency and
government intervention (i.e. when governments regulate the free market). We will look at:
An externality is an effect caused by consuming/producing a good. This effect falls on a
person who is not the consumer/producer of the good.
Externalities can be negative or positive.
A negative externality is
Page 1 of 10
Answer all the multiple choice questions in part one. Circle the correct answer on the question
Answer any four questions in part two.
You may answer the questions in any order. If yo
Retail Gains from Trade
This news story explains how US firms are setting up in Canada while Canadian firms are closing
down. Put simply, the firms that are closin
Cap and trade is a way of dealing with pollution (particularly greenhouse gasses like CO 2).
It is not currently in operation in Canada or the USA but is operating in Europe. The idea is to give
We have looked at how quantities demanded and supplied change in response to a change in
price. The next question is how much do demand and supply change when prices change?
Experience tells us that for some good
So far we assumed that we cant produce outside the PPF. But trade allows a country to
consume beyond the limits of its PPF.
The basis for trade is comparative advantage a person or country has comparat
We will make the following simplifying assumptions about a persons income:
She can spend it on 2 goods
All income is spent (no saving)
We get a budget line that is like the PPF. If all
Sample Question Gains from Trade.
1. Define comparative advantage 
2. Use the table to answer question 2.
a) What are the opportunity costs of each good in each factory? 
Demand and supply
This topic is one of the most fundamental on the course. It is central to the analysis of how
resources are distributed in a market economy.
Adam Smith in his book Theory of moral sentiments (1759) wrote abo
This is a practice question that isnt to be handed in. Its a question from a mid-term a few
years ago. I will go through it in class once we have finished this topic.
PPF and Opportunity Costs.
a) Draw a Production Possibilit
Afers Internacionals, nm. 2 5, p p. 71-96
E l proceso de adopcion del
Principio de Subsidiariedad en la
Dr. Joan Llus Piol*
El Principio de Subsidiariedadl,a partir de ahora PS, hasido descrit0 por 10s peridicos
de toda Europa como una p
Bruges European Economic Policy Briefings
Testing For Subsidiarity*
BEEP briefing n 13
The paper was published in Thomas Bruha/Carsten Nowak (eds.), 2005, Die Europische Union: I
EL PRINCIPIO DE SUBSIDIARIEDAD
EN LA CONSTRUCCIN
DE LA UNION EUROPEA (*)
JOS M. DE AREILZA CARVAJAL
When I use a word, Humpty Dumpty said, in rather a
scornful tone, it means just what I chose it to mean neither
more or less.
The question is, said Alice,
Public Choice (2005) 123: 275319
What does the European Union do?
ALBERTO ALESINA1 , IGNAZIO ANGELONI2 & LUDGER
University, NBER and CEPR, Cambridge, Massachussets, U.S.A.; 2 European C