Markets, Methods & Models - Lyryx Learning

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Microeconomics

Markets, Methods & Models

an Open Text

by Douglas Curtis and Ian Irvine

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VERSION 2017 ? REVISION A

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advancing learning

Microeconomics

an Open Text by Douglas Curtis and Ian Irvine

Version 2017 -- Revision A

Version 2017 ? Revision A: Updates include new cover and back pages, new front matter. Version 2015 ? Revision A: The content in this version has been revised in several respects. The content has been updated to include discussion about the role Uber has played in undermining taxi cartels in numerous cities. A new section regarding wealth inequality, and based on the best selling book of Thomas Piketty published in 2014.

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Table of Contents

Table of Contents

iii

Part One: The Building Blocks

3

1 Introduction to key ideas

5

1.1 What's it all about? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1.2 Understanding through the use of models . . . . . . . . . . . . . . . . . . . . . . 9

1.3 Opportunity cost and the market . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

1.4 A model of exchange and specialization . . . . . . . . . . . . . . . . . . . . . . . 12

1.5 Economy-wide production possibilities . . . . . . . . . . . . . . . . . . . . . . . 15

1.6 Aggregate output, growth and business cycles . . . . . . . . . . . . . . . . . . . . 17

Key terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

End of chapter exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

2 Theories, models and data

27

2.1 Observations, theories and models . . . . . . . . . . . . . . . . . . . . . . . . . . 27

2.2 Variables, data and index numbers . . . . . . . . . . . . . . . . . . . . . . . . . . 29

2.3 Testing economic models & analysis . . . . . . . . . . . . . . . . . . . . . . . . . 39

2.4 Diagrams and economic analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

iii

iv Table of Contents 2.5 Ethics, efficiency and beliefs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Key terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 End of chapter exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

3 The classical marketplace ? demand and supply

57

3.1 Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

3.2 The market's building blocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

3.3 Demand and supply curves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

3.4 Other influences on demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

3.5 Other influences on supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

3.6 Simultaneous supply and demand impacts . . . . . . . . . . . . . . . . . . . . . . 73

3.7 Market interventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

3.8 Individual and market functions . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Key terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

End of chapter exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Part Two: Responsiveness and the Value of Markets

87

4 Measures of response: elasticities

89

4.1 Price responsiveness of demand . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

4.2 Price elasticity and expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

4.3 The time horizon and inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

4.4 Cross-price elasticities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

4.5 The income elasticity of demand . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

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