Solution Manual for Modern Principles of
Economics latest Edition
Incentives - answers Are rewards and penalties that motivate behaviour.
Opportunity cost - answers The opportunity cost of a choice is the value of the
opportunities lost.
Inflation - answers Is an increase in the general/average level of prices.
Big Ideas in Economics - answers 1. Incentives matter 2. Good Institutions Align Self-
Interest with the Social Interest 3. Trade-offs Are Everywhere 4. Thinking on the Margin
5. The Power of Trade 6. The Importance of Wealth and Economic Growth 7. Institution
Matter 8. Economic Booms and Busts Cannot Be Avoided but Can Be Moderated 9.
Prices Rice When the Government Prints Too Much Money 10. Central Banking Is a
Hard Job 0. Economics is Fun
Absolute advantage - answers Is the ability to produce the same good using fewer
inputs than another producer.
Production Possibilities Frontier (PPF) - answers A Production Possibilities Frontier
shows all the combinations of goods that a country can produce given its productivity
and supply of inputs.
Comparative Advantage - answers A country has a comparative advantage in producing
goods for which it has the lowest opportunity cost.
Adam Smith - answers (1723-1790), author of 'The Wealth of Nations' and one of the
greatest economists of all time. When smith could not finish teaching one semester, he
told his students he would refund their tuition.When the students refused the refund
saying they had learned so much already, Smith wept. One, however, will not refund the
purchase of a book even if you read only half of it.
Division of labour - answers Utilise specialisation to increase productivity
Demand Curve - answers A demand curve is a function that shows the quantity
demanded at different prices.
Quantity Demanded - answers The quantity demanded is the quantity that buyers are
willing and able to buy at a particular price.
Consumer surplus - answers Is the consumer's gain from exchange, or the maximum
price a consumer is willing to pay for a certain quantity and the market price.
,Total consumer surplus - answers Is measured by the area beneath the demand curve
and above the price.
Important demand shifters - answers Income, Population, Price of substitutes, Price of
compliments, Expectations, Tastes.
Shift in demand curve (decrease) - answers A decrease in demand shifts the demand
curve inward, down and to the left.
Shift in demand curve (increase) - answers An increase in demand shifts the demand
curve outward, up and to the right.
Important supply shifters - answers Technological innovations and changes in the price
of inputs, Taxes and subsidies, Expectations, Entry or exit of producers, Changes in
opportunity costs.
Shift in supply curve (decrease) - answers A decrease in cost shifts the supply curve
down and to the right.
Shift in supply curve (increase) - answers An increase in costs shifts the supply curve
up and to the left.
Normal Good - answers A normal good is a good for which demand increases when
income increases.
Substitute products - answers If two goods are substitutes, a decrease in the price of
one good leads to a decrease in demand for the other good.
Complement products - answers If two goods are complements, a decrease in the price
of one good leads to an increase in the demand for the other good.
Supply curve - answers The supply curve is a function that shows the quantity supplied
at different prices.
Quantity supplied - answers The quantity supplied is the amount of a good that sellers
are willing and able to sell at a particular price.
Producer surplus - answers Is the producer's gain from exchange, or the difference
between the market price and the minimum price at which a producer would be willing
to sell a particular quantity.
Total producer surplus - answers Is measured by the area above the supply curve and
below the price.
Surplus - answers A surplus is a situation in which the quantity supplied is greater than
the quantity demanded. It drives prices down.
, Shortage - answers A shortage is a situation in which the quantity demanded is greater
than the quantity supplied. It drives prices up.
Equilibrium price - answers The equilibrium price is the price at which the quantity
demanded is equal to the quantity supplied.
Equilibrium quantity - answers The equilibrium quantity is the quantity at which the
quantity demanded is equal to the quantity supplied.
Increase in supply - answers Means that sellers are willing to sell a greater quantity at
the same price, or they are willing to sell a given quantity at a lower price.
Increase in demand - answers Means that buyers want a greater quantity at the same
price, or they are willing to pay a higher price for the same quantity.
Elasticity of Demand - answers The elasticity of demand measures how responsive the
quantity demanded is to a change in price; more responsive equals more elastic.
Elasticity of Demand (less elastic) - answers Fewer substitutes, Short run (less time),
Categories of product, Necessities, Small part of budget.
Elasticity of Demand (more elastic) - answers More substitutes, Long run (more time),
Specific brands, Luxuries, Large part of budget.
Elasticity of Demand (formula) - answers E_d = %ΔQ_demanded/%ΔPrice
Elasticity of Demand is Elastic - answers E_d > 1
Elasticity of Demand is Inelastic - answers E_d < 1
Elasticity of Demand is Unit elastic - answers E_d = 1
Revenue - answers Price*Quantity
Revenue (elasticity) - answers Elasticity measures how much and in which direction Q
moves when P moves. Inelastic demand curve: revenues goes up when prices goes up.
Elastic demand curve: revenues goes down when prices goes up.
Elasticity of Supply - answers The elasticity of supply measures how responsive the
quantity supplied is to a change in price.
Elasticity of Supply (formula) - answers E_s = %ΔQ_supplied/%ΔPrice
A perfectly Inelastic curve - answers Goes 90 degrees out from one of the axis in a
graph.
Economics latest Edition
Incentives - answers Are rewards and penalties that motivate behaviour.
Opportunity cost - answers The opportunity cost of a choice is the value of the
opportunities lost.
Inflation - answers Is an increase in the general/average level of prices.
Big Ideas in Economics - answers 1. Incentives matter 2. Good Institutions Align Self-
Interest with the Social Interest 3. Trade-offs Are Everywhere 4. Thinking on the Margin
5. The Power of Trade 6. The Importance of Wealth and Economic Growth 7. Institution
Matter 8. Economic Booms and Busts Cannot Be Avoided but Can Be Moderated 9.
Prices Rice When the Government Prints Too Much Money 10. Central Banking Is a
Hard Job 0. Economics is Fun
Absolute advantage - answers Is the ability to produce the same good using fewer
inputs than another producer.
Production Possibilities Frontier (PPF) - answers A Production Possibilities Frontier
shows all the combinations of goods that a country can produce given its productivity
and supply of inputs.
Comparative Advantage - answers A country has a comparative advantage in producing
goods for which it has the lowest opportunity cost.
Adam Smith - answers (1723-1790), author of 'The Wealth of Nations' and one of the
greatest economists of all time. When smith could not finish teaching one semester, he
told his students he would refund their tuition.When the students refused the refund
saying they had learned so much already, Smith wept. One, however, will not refund the
purchase of a book even if you read only half of it.
Division of labour - answers Utilise specialisation to increase productivity
Demand Curve - answers A demand curve is a function that shows the quantity
demanded at different prices.
Quantity Demanded - answers The quantity demanded is the quantity that buyers are
willing and able to buy at a particular price.
Consumer surplus - answers Is the consumer's gain from exchange, or the maximum
price a consumer is willing to pay for a certain quantity and the market price.
,Total consumer surplus - answers Is measured by the area beneath the demand curve
and above the price.
Important demand shifters - answers Income, Population, Price of substitutes, Price of
compliments, Expectations, Tastes.
Shift in demand curve (decrease) - answers A decrease in demand shifts the demand
curve inward, down and to the left.
Shift in demand curve (increase) - answers An increase in demand shifts the demand
curve outward, up and to the right.
Important supply shifters - answers Technological innovations and changes in the price
of inputs, Taxes and subsidies, Expectations, Entry or exit of producers, Changes in
opportunity costs.
Shift in supply curve (decrease) - answers A decrease in cost shifts the supply curve
down and to the right.
Shift in supply curve (increase) - answers An increase in costs shifts the supply curve
up and to the left.
Normal Good - answers A normal good is a good for which demand increases when
income increases.
Substitute products - answers If two goods are substitutes, a decrease in the price of
one good leads to a decrease in demand for the other good.
Complement products - answers If two goods are complements, a decrease in the price
of one good leads to an increase in the demand for the other good.
Supply curve - answers The supply curve is a function that shows the quantity supplied
at different prices.
Quantity supplied - answers The quantity supplied is the amount of a good that sellers
are willing and able to sell at a particular price.
Producer surplus - answers Is the producer's gain from exchange, or the difference
between the market price and the minimum price at which a producer would be willing
to sell a particular quantity.
Total producer surplus - answers Is measured by the area above the supply curve and
below the price.
Surplus - answers A surplus is a situation in which the quantity supplied is greater than
the quantity demanded. It drives prices down.
, Shortage - answers A shortage is a situation in which the quantity demanded is greater
than the quantity supplied. It drives prices up.
Equilibrium price - answers The equilibrium price is the price at which the quantity
demanded is equal to the quantity supplied.
Equilibrium quantity - answers The equilibrium quantity is the quantity at which the
quantity demanded is equal to the quantity supplied.
Increase in supply - answers Means that sellers are willing to sell a greater quantity at
the same price, or they are willing to sell a given quantity at a lower price.
Increase in demand - answers Means that buyers want a greater quantity at the same
price, or they are willing to pay a higher price for the same quantity.
Elasticity of Demand - answers The elasticity of demand measures how responsive the
quantity demanded is to a change in price; more responsive equals more elastic.
Elasticity of Demand (less elastic) - answers Fewer substitutes, Short run (less time),
Categories of product, Necessities, Small part of budget.
Elasticity of Demand (more elastic) - answers More substitutes, Long run (more time),
Specific brands, Luxuries, Large part of budget.
Elasticity of Demand (formula) - answers E_d = %ΔQ_demanded/%ΔPrice
Elasticity of Demand is Elastic - answers E_d > 1
Elasticity of Demand is Inelastic - answers E_d < 1
Elasticity of Demand is Unit elastic - answers E_d = 1
Revenue - answers Price*Quantity
Revenue (elasticity) - answers Elasticity measures how much and in which direction Q
moves when P moves. Inelastic demand curve: revenues goes up when prices goes up.
Elastic demand curve: revenues goes down when prices goes up.
Elasticity of Supply - answers The elasticity of supply measures how responsive the
quantity supplied is to a change in price.
Elasticity of Supply (formula) - answers E_s = %ΔQ_supplied/%ΔPrice
A perfectly Inelastic curve - answers Goes 90 degrees out from one of the axis in a
graph.
