Modern Principles of Economics

elasticity of supply The elasticity of supply measures how responsive the quantity supplied is to a change in price.

The fact that oil is not equally valuable in all of its uses explains why the demand curve for oil has a negative slope. When the price of oil is high, consumers will choose to use oil only in its most valuable uses (e.g., gasoline and jet fuel). As the price of oil falls, consumers will choose to also use oil in its less and less valued uses (heat

But to benefit from trade, a country need not have an absolute advantage. For example, even if the United States did have the world’s best climate for growing sugar, it might still make sense for Brazil to grow sugar and for the United States to design iPads, if the United States had a bigger advantage in designing iPads than it did in growing suga

A production possibilities frontier shows all the combinations of goods that a country can produce given its productivity and supply of inputs.

In summary, a supply curve is a function that shows the quantity that suppliers would be willing and able to sell at different prices. The higher the price, the greater the quantity supplied—this is often called the “law of supply.”

Inflation is caused by a sustained increase in the supply of money. When people have more money, they spend it, and without an increase in the supply of goods, prices must rise. As Nobel laureate Milton Friedman once wrote: “Inflation is always and everywhere a monetary phenomenon.”

Consumer surplus Consumer surplus is the consumer’s gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price.

High-productivity countries have high wages; low-productivity countries have low wages. Trade means that workers in both countries can raise their wages to the highest levels allowed by their respective productivities.

Contrary to popular belief, slightly declining prices over time are common for minerals and other natural resources supplied under competitive conditions.