Modern Principles of Economics

A free market maximizes the gains from trade because (1) buyers are willing to pay more for the good than nonbuyers, (2) sellers are willing to sell the good at a lower price than nonsellers, and (3) there are no mutually profitable deals between nonsellers and nonbuyers.

The Great Depression (1929–1940) was not normal, but rather it was the most catastrophic economic event in the history of the United States. National output plummeted by 30 percent, unemployment rates exceeded 20 percent, and the stock market lost more than two-thirds of its value.

elasticity of demand The elasticity of demand measures how responsive the quantity demanded is to a change in price; more responsive equals more elastic.

When the absolute value of the elasticity is less than 1, the demand is not very elastic or economists say the demand is inelastic; if it is greater than 1, economists say that demand is elastic; and if it is exactly equal to 1, economists say that demand is unit elastic

equilibrium quantity The equilibrium quantity is the quantity at which the quantity demanded is equal to the quantity supplied.

There are few substitutes for oil in its major use, transportation, so when the price increases by a lot, the quantity demanded falls by only a little. Thus, the demand curve for oil is not very elastic and would be best represented by demand curve I.

Big Idea Six: The Importance of Wealth and Economic Growth

Big Idea Two: Good Institutions Align Self-Interest with the Social Interest

in a free market there tends not to be unexploited gains from trade—at least not for long—or wasteful trades. Put these two things together and we have a remarkable result. A free market maximizes the gains from trade. The gains from trade can be broken down into producer surplus and consumer surplus, so we can also say that a free market maximizes