Walter J. Wessels - Economics, 6th edition (Business Review Series)

Copyright 2018, 2012, 2006, 2000, 1993, 1987 by Barrons Educational Series, Inc.

All rights reserved.

No part of this work may be reproduced in any form by photostat, microfilm, xerography, or any other means, or incorporated into any information retrieval system, electronic or mechanical, without the written permission of the copyright owner.

All inquiries should be addressed to:

Barrons Educational Series, Inc.

250 Wireless Boulevard

Hauppauge, New York 11788

www.barronseduc.com

eISBN: 978-1-4380-6504-5

Revised eBook publication December 2017.

CONTENTS

Welcome to Barrons Business Review: Economics, 6th Edition e-Book version! Please be aware that any tables, graphs, passages, and other illustrations may appear differently from one device to another. You may need to adjust your device accordingly.

This e-Book contains hyperlinks that will help you navigate through content and bring you to helpful resources.

The goal of this text is singular: to help you understand economics so that you will do better in class and in business, and to do this as clearly and concisely as possible. The strong positive response from the previous editions shows that this goal was achieved. We have revised this text to bring you up-to-date with current economic understanding. Some of the new topics covered are game theory, real business cycle models, international capital markets, the random walk model of the stock market, and the economic role of financial markets.

Both students taking economics who want to do better in economics class and business professionals who want to understand better the economic environment they compete in will find this book beneficial. Unlike most texts, we test your understanding throughout each chapter with problems and answers, so that small misunderstandings do not grow. And unlike most study guides, we give you complete explanations and useful examples to help you do these problems.

Throughout this guide, you will find it easy to learn the essentials of economics, especially if you follow the procedure outlined:

Learn the Definitions and Main Points. Each chapter begins with Key Terms discussed throughout the unit. This is followed by You Should Remember, which summarizes main points taught.

Work Each Example and Graph. As you read the chapters, be sure you work out each example. In addition, because using graphs is essential to understanding economics, be sure you understand each graph before going on to new material. One way to assure this is to redraw each graph and see how it matches the explanation given in the text.

Do All Problems.Do You Know the Basics tests your understanding of the basic concepts of economics. Practical Application tests your ability to apply the economic tools you have learned. Answers are provided for both. Dont skip either of these sections!

Understand the Assumptions Being Made. Economists use economic models to understand the world. Once you understand an economic models assumptions, the results will follow logically. In this text, the assumptions of Keynesian, monetarist, and rational-expectations models are presented in separate chapters so that you can focus on each and thus understand how and why each model works the way it does.

An understanding of economics is essential for understanding the economic events that affect us all. Carefully studying this book in the way I have outlined will help you gain that understanding.

KEY TERMS

economics study of how people choose among alternative uses of their scarce resources.

marginal analysis evaluating the costs and benefits of a small increase in a variable (such as output). If a rational person finds that increasing the variable adds more to total benefits than to total costs (that is, if marginal benefit exceeds marginal cost), then the person will on net be better off increasing the variable.

normative statement a statement about how things should be in a moral sense.

opportunity cost value of the best alternative that had to be forgone in order to undertake a given course of action.

positive statement a statement about what really is and that can be observed as true or false.

production possibility curve (or frontier) a graph showing combinations of goods that an individual, a firm, or an economy is capable of producing.

scarcity a condition that exists when current resources are inadequate to provide for all of peoples wants. A good is scarce if another unit of the good would benefit someone. Another test: The good is scarce if when price of the good is zero (it is free), the quantity people demand (want) exceeds its supply. For example, a cave person considers fresh air to be a free good. In Los Angeles, fresh air is scarce.

The social sciences seek to describe how people will act. What makes economics different from the other social sciences is the models economists use. Economic models assume people are rational (with well-ordered preferences), want to maximize something (such as profits or satisfaction), and then do the best they can given their scarce resources. People face choices because they have too few resources to do all they want. They face the trade-off of achieving some wants and giving up on others. They are said to do this rationally if they then make choices they expect will best achieve what they want. Given this, economics can predict how changing resources and trade-offs affect what people do.

Consider a simple economic model. We are at a grocery store that has several checkout lanes open. It is a crowded day, and people are in every line. We want a model predicting how many people will be in each line. An economist would likely assume that people know how fast each line is moving and that people seek to spend the least time in line. If the waiting time in one line is less, people will change lines. This will continue until all lines have the same expected wait time. This is the key prediction of the model. It also predicts that slower clerks will have shorter lines.

The prediction of equal waiting time is a positive statement. A positive statement is a claim about what really is. A positive statement can be tested. We could, for example, find the wait time in a grocery store. Most likely, we would find only an average wait time. However, the results could be wrong because the assumptions may be wrong (people may not have sufficient information or they may care about more things than just the wait time). Thus, a positive statement is a statement that can be demonstrated to be true or false.

Another type of statement is a normative statement. A normative statement makes a moral claim about what shouldbe. For example, some customers might say, Some customers have to wait longer than others, and that is not fair. Without making a moral judgment, no way exists to say that such a statement is right.

Economics is the study of how people choose to allocate their scarce resources. Economists study these choices with models like the one above. Most economic models have three common elements: scarcity, cost, and marginal analysis. Typically, something is scarce (for example, time or money). This results in costs (doing one thing means giving up doing something else). Therefore, the best way of finding out how to get the most of what one wants is by marginal analysis. These three conceptsscarcity, cost, and marginal analysisform the base upon which economics is built.