Naked Economics Chapter 1 Summary

Chapter Summaries

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1: The Fundamentals of Economics 2: Markets and Government in a Modern Economy 3: Basic Elements of Supply and Demand 4: Applications of Supply and Demand 5: Demand and Consumer Behavior 6: Production and Business Organization 7: Analysis of Costs 8: Analysis of Perfectly Competitive Markets 9: Imperfect Competition and Its Polar Case of Monopoly 10: Oligopoly and Monopolistic Competition 11: Uncertainty and Game Theory 12: How Markets Determine Incomes 13: The Labor Market
Basic Concepts 1. The relationship between the quantity of output (such as wheat, steel, or automobiles) and the quantities of inputs (of labor, land, and capital) is called the production function. Total product is the total output produced. Average product equals total output divided by the total quantity of inputs. We can calculate the marginal product of a factor as the extra output added for each additional unit of input while holding all other inputs constant. 2. According to the law of diminishing returns, the marginal product of each input will generally decline as the amount of that input increases, when all other inputs are held constant. 3. The returns to scale reflect the impact on output of a balanced increase in all inputs. A technology in which doubling all inputs leads to an exact doubling of outputs displays constant returns to scale. When doubling inputs leads to less than double (more than double) the quantity of output, the situation is one of decreasing (increasing) returns to scale. 4. Because decisions take time to implement, and because capital and other factors are often very long lived, the reaction of production may change over different time periods. The short run is a period in which variable factors, such as labor or material inputs, can be easily changed but fixed factors cannot. In the long run, the capital stock (a firm's machinery and factories) can depreciate and be replaced. In the long run, all inputs, fixed and variable, can be adjusted. 5. Technological change refers to a change in the underlying techniques of production, as occurs when a new product or process of production is invented or an old product or process is improved. In such situations, the same output is produced with fewer inputs or more output is produced with the same inputs. Technological change shifts the production function