“In this world nothing is certain but death and taxes.” . . . Benjamin Franklin 0 20 40 60 80 100 1789 Taxes paid in Ben Franklin’s time accounted for 5 percent of the average American’s income
The Theory of Consumer Choice The theory of consumer choice addresses the following questions: – Do all demand curves slope downward? – How do wages affect labor supply? – How do interest rates affect household saving?
Interdependence and Trade Consider your typical day: – You wake up to a alarm clock made in Wenzhou – You put on some clothes made of cotton grown in Xinjiang and sewn in factories in Fujian Province
Elasticity… … is a measure of how much buyers and sellers respond to changes in market conditions … allows us to analyze supply and demand with greater precision
Revisiting the Market Equilibrium Do the equilibrium price and quantity maximize the total welfare of buyers and sellers? Market equilibrium reflects the way markets allocate scarce resources. Whether the market allocation is desirable is determined by welfare economics
Market Efficiency-Market Failure Recall that: Adam Smith’s “invisible hand” of the marketplace leads self-interested buyers and sellers in a market to maximize the total benefit that society can derive from a market
The Law of Supply Firms are willing to produce and sell agreater quantity of a good when the priceof the good is higher. This results in a supply curve that slopesupward
Monopoly While a competitive firm is a price taker, amonopoly firm is a price maker. A firm is considered a monopoly if . . . – it is the sole seller of its product. – its product does not have close substitutes
