7. Production Efficiency

An economic level at which the economy can no longer produce additional amounts of a good without lowering the production level of another product. This will happen when an economy is operating along its production possibility frontier. The ability to produce a good using the fewest resources possible. Efficient production is achieved when a product is created at its lowest average total cost.

Production efficiency measures whether the economy is producing as much as possible without wasting precious resources. Theoretically, production efficiency will include all of the points along the production possibility frontier, but this is difficult to measure in practice. Because resources are limited, being able to make products efficiently allows for higher levels of production. If the economy can't make more of a good without sacrificing the production of another, then a maximum level of production has been reached.

Эффективность производства - отношение между затратами ограниченных ресурсов и произведенным в результате их использования объемом товаров или услуг.  Эффективность производства - производство продукта определенной стоимости с наименьшими издержками.

8. The ppf and Marginal Cost

A production possibility frontier (PPF) is a curve or a boundary which shows the combinations of two or more goods and services that can be produced whilst using all of the available factor resources efficiently.

Marginal cost is the opportunity cost of producing one more unit of a good.

The slope of the production–possibility frontier (PPF) at any given point is called the marginal rate of transformation (MRT). The slope defines the rate at which production of one good can be redirected (by reallocation of productive resources) into production of the other. 

The marginal benefit of a good or services is the benefit received from consuming one more unit of it.

The principle of decreasing marginal benefits is why the marginal benefit curve in the figure above slopes downward.

9. Markets and Prices

A market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labor) in exchange for money from buyers. It can be said that a market is the process by which the prices of goods and services are established.

For a market to be competitive, there must be more than a single buyer or seller.

 Рrice is the quantity of payment or compensation given by one party to another in return for goods or services.

• The price of a good or service is the number of money that must be given up for it. The ratio of one (money) price to another is called a relative price., A relative price is an opportunity cost. The theory of demand and supply determines relative prices and so when we use the word “price” we mean “relative price.”

10. The law of demand

Demand

• The price of a good or service affects the quantity people plan to buy. The quantity demanded of a good or service is the amount that consumers plan to buy during a given time period at a particular price.

• The law of demand states that other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater the quantity demanded. The law of demand occurs for two reasons:

• Substitution Effect: When the relative price of good changes, the opportunity cost of the good changes. An increase in the price increases the opportunity cost of buying the good and people respond by buying less of the good and buying more of its substitutes.

• Income Effect: A change the price of a good changes the amount that a person can afford to buy. When the price of a good rises, people cannot afford to buy the same quantities that they purchased before, so the quantities bought of some goods and services must decrease. Normally the good whose price rises is one of the goods for which less is purchased.

11. A Change in the Quantity Demanded Versus a Change in Demand

A change in price results in a movement along the demand curve, which is change in the quantity demanded. A change in other factors shifts the demand curve, which is a change in demand.

In the figure, the movement along demand curve D₀ from point a to point b as a result of the price rising from $2 to $4 is a change in the quantity demanded. The shift of the demand curve from D₀ to the new demand curve D₁ is a change in demand.

12. The law of supply

The law of supply states that other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller the quantity supplied. The law of supply occurs because an increase in the quantity of a good produced results in an increase in its marginal cost. So the price must rise in order to induce firms to increase the quantity they produce.

13. A Change in the Quantity Supplied Versus a Change in Supply

A change in price results in a movement along the supply curve, which is change in the quantity supplied. A change in other factors shifts the supply curve, which is a change in supply.

In the top figure, the movement along supply curve S₀ from point a to point b as a result of the price rising from $2 to $4 is a change in the quantity supplied. The shift of the supply curve from S₀ to the new supply curve S₁ is a change in supply.

14. Market Equilibrium

• An equilibrium is a situation in which opposing forces balance.

• The equilibrium price is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity is the quantity bought and sold at the equilibrium price. In the bottom figure, the equilibrium price is $3 and the equilibrium quantity is 30 per week.

Price as a Regulator and Price Adjustments

• The price of a good regulates the quantities demanded and supplied.

• Shortage: If the price is below the equilibrium price, consumers plan to buy more than firms plan to sell. A shortage results, which forces the price higher, toward the equilibrium price. In the figure, there is a shortage at any price below $3 and so the price is forced higher, toward the equilibrium price.

• Surplus: If price is above the equilibrium, firms plan to sell more than consumers plan to buy. A surplus results, which forces the price lower, toward the equilibrium price. In the figure, there is a surplus at any price above $3 and so the price is forced lower, toward the equilibrium price.

The price continues to adjust until the quantity supplied equals quantity demanded.

15. Predicting Changes in Price and Quantity

demand and supply model can be used to determine how changes in factors affect a good’s price and quantity.

A Change In Demand

• If the demand for a good or service increases, the demand curve shifts rightward. As a result, the equilibrium price rises and the equilibrium quantity increases.

• If the demand for a good or service decreases, the demand curve shifts leftward. As a result, the equilibrium price falls and the equilibrium quantity decreases.

• Supply does not change and the supply curve does not shift. Instead there is a change in the quantity supplied and a movement along the supply curve.

• The figure illustrates an increase in demand. In the figure the demand curve shifts from D₀ to D₁. As a result, the equilibrium price rises from $3 to $4 and the equilibrium quantity increases from 30 to 40. The supply curve does not shift; there is, however, a movement along the supply curve.

A Change In Supply

• If the supply of a good or service increases, the supply curve shifts rightward. As a result, the equilibrium price falls and the equilibrium quantity increases.

• If the supply of a good or service decreases, the supply curve shifts leftward. As a result, the equilibrium price rises and the equilibrium quantity decreases.

• Demand does not change and the demand curve does not shift. Instead there is a change in the quantity demanded and a movement along the demand curve.

• The figure illustrates an increase in supply. In the figure the supply curve shifts from S₀ to S₁. As a result, the equilibrium price falls from $3 to $2 and the equilibrium quantity increases from 30 to 40. The demand curve does not shift; there is, however, a movement along the demand curve.

16. Demand and Supply Change in the Same Direction

both the demand and the supply of a good or service increase, both the demand and supply curves shift rightward. The quantity unambiguously increases but the effect on the price is ambiguous.

• If the increase in demand is greater than the increase in supply, the price rises.

• If the increase in demand is the same size as the increase in supply, the price does not change.

• If the increase in demand is less than the increase in supply, the price falls.

• If both the demand and the supply of a good or service decrease, both the demand and supply curves shift leftward. The quantity unambiguously decreases but the effect on the price is ambiguous.

• If the decrease in demand is greater than the decrease in supply, the price falls.

• If the decrease in demand is the same size as the decrease in supply, the price does not change.

• If the decrease in demand is less than the decrease in supply, the price rises.

The figure illustrates an increase in both demand and supply. In the figure the demand curve shifts from D₀ to D₁ and the supply curve shifts from S₀ to S₁. The shifts are the same size, so the equilibrium price does not change and the equilibrium quantity increases from 30 to 50.

17. Demand and Supply Change in the Opposite Directions

If the demand increases and the supply decreases, the demand curve shifts rightward and the supply curve shifts leftward. The price unambiguously rises but the effect on the quantity is ambiguous.

• If the increase in demand is greater than the decrease in supply, the quantity increases.

• If the increase in demand is the same size as the decrease in supply, the quantity does not change.

• If the increase in demand is less than the decrease in supply, the quantity decreases.

• If the demand decreases and the supply increases, the demand curve shifts leftward and the supply curves shifts rightward. The price unambiguously falls but the effect on the quantity is ambiguous.

• If the decrease in demand is greater than the increase in supply, the quantity decreases.

• If the decrease in demand is the same size as the increase in supply, the quantity does not change.

• If the decrease in demand is less than the increase in supply, the quantity increases.

The figure illustrates an increase in demand and a decrease in supply. In the figure the demand curve shifts from D₀ to D₁ and the supply curve shifts from S₀ to S₁. The shifts are the same size, so the equilibrium quantity does not change and the equilibrium price rises from $3 to $5.

18. Price Elasticity of Demand

In general, elasticity measures responsiveness. The price elasticity of demand measures how responsive demanders are to a change in the price of the good. This information is often useful for both businesses and governments.

Calculating the Price Elasticity of Demand

• The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on a buyer’s plans remain unchanged. The price elasticity of demand is equal to the absolute value of:

• The demand elasticity formula yields a negative value, because price and quantity move in opposite directions. However, it is the magnitude, or absolute value, of the measure that reveals how responsive the quantity change has been to a price change. So we use the magnitude or the absolute value of the price elasticity of demand.

• The table to the right has two points on the demand curve for pizza from a particular pizza parlor.

Price (dollars per pizza)	Quantity demanded (pizzas per week)
14	500
16	400

• The absolute value of the percent change in quantity demanded is [(500  400)  450]  100 = 22.2 percent.

• The absolute value of the percentage change in price is [($14  $16)  $15]  100 = 13.3 percent.

• Between these two points on the demand curve, the price elasticity of demand is 22.2%  13.3% = 1.67.

19. Inelastic and Elastic Demand

• If the price elasticity of demand is less than 1.0, the good is said to have an inelastic demand. In this case, the percentage change in the quantity demanded is less than the percentage change in price.

• If the quantity demanded remains constant when the price changes, then the good is said to have perfectly inelastic demand. The price elasticity of demand is 0 and the good’s demand curve is a vertical line.

• If the price elasticity of demand is equal to 1.0, the good is said to have a unit elastic demand. In this case, the percentage change in the quantity demanded equals the percentage change in price.

• If the price elasticity of demand is greater than 1.0, the good is said to have an elastic demand. In this case, the percentage change in the quantity demanded exceeds the percentage change in price.

• If the quantity demanded changes by an infinitely large percentage in response to a tiny price change, then the good is said to have perfectly elastic demand. The price elasticity of demand is infinite.

• The table has some “real-life” elasticities from the book.

Furniture	1.26
Motor Vehicles	1.14
Clothing	0.64
Oil	0.05

Elasticity Along a Straight-Line Demand Curve

• With the exception of a vertical demand curve and a horizontal demand curve (along which the elasticity is 0 and infinite, respectively) the price elasticity of demand changes when moving along a linear demand curve.

• As the figure illustrates, at points on the demand curve above the midpoint, the price elasticity of demand is elastic while at points below the midpoint, the price elasticity of demand is inelastic. At the midpoint, the price elasticity of demand is unit elastic.

Total Revenue and Elasticity

• The total revenue from the sale of a good equals the price of the good multiplied by the quantity sold.

• If demand is elastic, a 1 percent price cut increases the quantity sold by more than 1 percent and total revenue increases.

• If demand is unit elastic, a 1 percent price cut increases the quantity sold by 1 percent and total revenue does not change.

• If demand is inelastic, a 1 percent price cut increases the quantity sold by less than 1 percent and total revenue decreases.

• The total revenue test is a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in price, when all other influences on the quantity sold remain the same.

• If a price cut increases total revenue, demand is elastic. And if a price hike decreases total revenue, demand is elastic.

• If a price cut does not change total revenue, demand is unit elastic. And if a price hike does not change total revenue, demand is unit elastic.

• If a price cut decreases total revenue, demand is inelastic. And if a price hike increases total revenue, demand is inelastic.

• Similarly, when a price changes, a consumer’s change in expenditure depends on the consumer’s elasticity of demand.

• If demand is elastic, then a price cut means that expenditure on the item increases.

• If demand is inelastic, then a price cut means that expenditure on the item decreases.

• If demand is unit elastic, then a price cut means that expenditure on the item does not change.

20. The Factors that Influence the Elasticity of Demand

The magnitude of the price elasticity of demand depends on:

• The closeness of substitutes: The closer and more numerous the substitutes for a good or service, the more elastic the demand.

• The proportion of income spent on the good: The greater the proportion of income spent on a good or service, the more elastic the demand.

• The amount of time elapsed since the price change: The longer the time elapsed since the price change, the more elastic the demand.

21. The cross elasticity of demand

The cross elasticity of demand is a measure of the responsiveness of the demand for a good to a change in the price of a substitute or compliment, other things remaining the same.

The cross elasticity of demand is equal to:

The changes in the quantity demanded and the price are percentages of the average price and quantity demanded over the range of change.

The cross elasticity of demand is positive for substitutes and negative for complements.

22. The income elasticity of demand

The income elasticity of demand is a measure of the responsiveness of the demand for a good to a change in the income, other things remaining the same.

The income elasticity of demand is equal to:

The changes in the quantity demanded and income are percentages of the average income and quantity demanded over the range of change.

The income elasticity of demand is positive for normal goods and negative for inferior goods.

• If the income elasticity of demand is greater than 1, demand is income elastic and the good is a normal good. As income increases, the percentage of income spent on income elastic goods increases

• If the income elasticity of demand is positive but less than 1, demand is income inelastic and the good is a normal good. As income increases, the percentage of income spent on income inelastic goods decreases.

• If the income elasticity of demand is negative the good is an inferior good.

• The table has some “real-life” income elasticities from the book.

Airline Travel	5.82
Restaurant Meals	1.61
Clothing	0.51
Food	0.14

23. The elasticity of supply

• The elasticity of supply measures how responsive suppliers are to a change in the price of the good..

• The elasticity of supply measures the responsiveness of the quantity supplied to a change in the price of a good when all other influences on selling plans remain unchanged. The elasticity of supply is equal to:

Three Cases of Elasticity of Supply

• Supply is perfectly inelastic if the elasticity of supply equals 0. In this case, the supply curve is vertical.

• Supply is unit elastic if the elasticity of supply equals 1. In this case, the supply curve is linear and passes through the origin. If any supply curve is linear and passes through the origin, the supply is unit elastic; the slope of the supply curve is irrelevant.

• Supply is perfectly elastic if the elasticity of supply is infinite. In this case, the supply curve is horizontal.

• The table to the right has two points on the supply curve for pizza from a particular pizza parlor.

• The percentage change in the quantity supplied is [(400  300)  350]  100 = 28.6 percent.

• The percentage change in price is [($16  $14)  $15]  100 = 13.3 percent.

• Between these two points, the elasticity of supply is 28.6%  13.3% = 2.15.

• Supply is elastic if the elasticity of supply exceeds 1.0, unit elastic if the elasticity of supply equals 1.0, and inelastic if the elasticity of supply is less than 1.0.

• The table to the right has two points on the supply curve for pizza from a particular pizza parlor.

• The percentage change in the quantity supplied is [(400  300)  350]  100 = 28.6 percent.

• The percentage change in price is [($16  $14)  $15]  100 = 13.3 percent.

• Between these two points, the elasticity of supply is 28.6%  13.3% = 2.15.

• Supply is elastic if the elasticity of supply exceeds 1.0, unit elastic if the elasticity of supply equals 1.0, and inelastic if the elasticity of supply is less than 1.0.