This topic begins with a discussion of the meaning and importance of economics. In this first topic, however, we will not plunge into problems and issues; instead we consider some important preliminaries. We first look at the economic perspective— how economists think about problems. Next, we examine the specific methods economists use to examine economic behaviour and the economy, including distinguishing between macroeconomics and microeconomics. We then look at the economizing problem from both an individual and societal perspective. For the individual we develop the budget line, for society the production possibilities model. In our discussion of production possibilities, the concepts of opportunity costs and increasing opportunity costs, unemployment, growth, and present vs. future possibilities are all demonstrated.

This topic begins with a brief comparison of the command and market systems, transitioning quickly to a discussion of the institutional framework of the American market system. Brief explanations are given for these characteristics of the market system: private property, freedom of enterprise and choice, the role of self-interest, competition, markets and prices, the reliance on technology and capital goods, specialization, use of money, and the active, but limited role of government. The authors then address the Five Fundamental Questions faced by every economy and explain how a market economy answers each one. A discussion of Adam Smith’s “invisible hand” leads into an explanation of why command systems have failed. The final part of the topic introduces the circular flow model as an overview of how resources and goods move through a market system.

This topic provides an introduction to demand and supply concepts. Both demand and supply are defined and illustrated; determinants of demand and supply are listed and explained. The concept of equilibrium and the effects of changes in demand and supply on equilibrium price and quantity are explained and illustrated. The topic also includes brief discussions of efficiency (productive and allocative), and price controls (floors and ceilings).

This topic begins with a discussion of the meaning of elasticity and the interpretations of the elasticity coefficient. Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in the topic. The text attempts to sharpen students’ ability to estimate price elasticity by discussing its major determinants. Cross- and income elasticities of demand and price elasticity of supply are also addressed.

In this topic, you will see how individual consumers allocate their incomes among various goods and services available to them. Given a certain budget, how does a consumer decide which goods and services to buy? This topic will develop a model to answer this question. The law of diminishing marginal utility is developed further, leading into a detailed discussion of the theory of consumer choice. The numerical illustrations of the utility-maximizing rule should be viewed as a pedagogical technique, rather than an attempt to portray the actual choice-making process of consumers. When this illustration is explained by “order of purchase,” the brief algebraic summary of consumer equilibrium should pose no great difficulties for most students.

This topic develops a number of crucial cost concepts that will be employed in the succeeding three chapters to analyze the four basic market models. A firm’s implicit and explicit costs are explained for both short and long run periods. The explanation of short run costs includes arithmetic and graphic analyses of the total, average, and marginal-cost concepts. The law of diminishing returns is explained as an essential concept for understanding average and marginal cost curves. The general shape of each cost curve and the relationship they bear to one another are analyzed with special care. The final part of the topic develops the long run average cost curve and analyzes the character and factors involved in economies and diseconomies of scale.

This topic is the first of three closely related topics analyzing the four basic market models—pure competition, pure monopoly, monopolistic competition, and oligopoly. Here the market models are introduced and explained. Explanations and characteristics of the four models are outlined at the beginning of this topic. Then the characteristics of a purely competitive industry are detailed. There is an introduction to the concept of the perfectly elastic demand curve facing an individual firm in a purely competitive industry. Next, the total, average, and marginal revenue schedules are presented in numeric and graphic form. Using the cost schedules from the previous chapter, the idea of profit maximization is explored. The total-revenue—total-cost approach is analyzed first because of its simplicity. More space is devoted to explaining the MR = MC rule, and to demonstrating that this rule applies in all market structures, not just in pure competition. Next, the firm’s short run supply schedule is shown to be the same as its marginal-cost curve at all points above the average-variable-cost curve. Then the short run competitive equilibrium is discussed at the firm and industry levels.

This topic looks at the characteristics of pure monopoly; the barriers to entry that create and protect monopolies; price and output determination under monopoly. The discussion of barriers to entry states at the outset that these barriers may occur to some extent in any form of imperfect competition, not just in a pure monopoly. The concept of a natural monopoly is addressed in this section. Building on the analysis of the preceding topics, the discussion of price output decision-making by monopoly firms points out that the marginal-revenue—marginal-cost rule still applies. The emphasis here is on the major difference between the determination of marginal revenue in pure competition and in pure monopoly.

Pure competition and pure monopoly are the exceptions, not the rule, in any economy. In this topic, the two market structures that fall between the extremes are discussed. Monopolistic competition contains a considerable amount of competition mixed with a small dose of monopoly power. Oligopoly, in contrast, implies a blend of greater monopoly power and less competition. First, monopolistic competition is defined, listing important characteristics. Next, we turn to oligopoly, listing important characteristics.