20 - CHAPTER 1 Five Foundations of Economics

• We've come a long way in our exploration of microeconomics.
• We apply our economic toolkit to health care.

• The health care crisis in the United States is caused by the debate over healthcare spending.
• Universal health care, also known as national health care, is the solution to the healthcare crisis because it would help to control costs.
• The federal healthcare law often called "Obamacare" argues that expanding healthcare coverage will lower healthcare costs.
• Supporters and opponents disagree.

• The debate about healthcare is about trade-offs.
• In this chapter, we discuss how the healthcare industry works and how the government and the market can make the delivery of health care more efficient.
• We consider how health care is delivered, who pays, and what makes the provision of medical care unlike the delivery of services in any other sector of the economy.
• Supply and demand analysis is used to look at the medical market.
• Information plays an important role in the incentive structure of medical care.

• There are many sides to the healthcare debate.

• It's a big business to provide health care.
• The education and automobile sectors make up 10% of the national economic output.

• Almost $3 trillion is spent annually in the United States, or over $8,000 for every citizen.
• That is a lot of money, no matter how you slice it.

• The key issues in health care are how much is spent on it, where the money goes, and who the key players in the industry are.
• The goal is to show you how the sector works.
• We turn our attention to supply and demand.
• We look at how health care has changed over time.

• Life expectancy in the United States was less than 50 years at the start of the twentieth century.
• It would have been unthinkable a few generations ago that life expectancy is close to 80 years.
• Some of the advances that have improved the human condition can be seen in the way medical care was delivered.

• In the United States, infectious diseases were the most common cause of death.
• Major killers were tetanus, diphtheria, gangrene, gastritis, and smallpox.

• A cure was often worse than the condition it was supposed to treat because of the poor state of medical knowledge.
• Tobacco was used to treat bronchitis and asthma, and leeches were used to fight laryngitis.

• In the first half of the twentieth century, a trip to the doctor was often painful and did not produce positive results.

• Since 1950, advances in cellular biology have led to better understanding of diseases and more precise diagnostic tests.
• In addition, discoveries in biomedical engineering have led to the widespread use of various diagnostic techniques.

• The medical practices of the past have been replaced by technological innovations.
• In addition, pharmaceutical companies have developed a number of "miracle" drugs for fighting many conditions, including high blood pressure, leukemia, and bad cholesterol.

• Sometimes, the medical advances cost a lot of money.
• In exchange for a longer life expectancy, we have made a trade-off: we now devote more of our budgets to health care.

• The United States spends more on healthcare than any other country.
• The expenditures in Canada and Mexico are similar, but this one is a bit higher.
• Canada and Mexico both spend a bit more on health care.

• Life expectancy in the United States is lower than in Canada because the United States spends more on health care.

• Most countries agree that increased healthcare expenditures are making people healthier, happier, and more productive.
• Environmental factors, genetics, and lifestyle choices are variables that are not constant across countries.
• We should be asking if we are getting our money's worth, not how much we are spending.
• The economists are most concerned with the obstacles to the efficient delivery of medical care.

• There are many reasons.
• Health insurance contributes.
• When private insurance covers most treatment costs, many patients agree to tests or medical visits that they wouldn't be willing to pay for out of pocket.
• If the patient isn't paying directly, doctors are more willing to order tests that aren't necessary.
• Medicare and Medicaid add to the demand for medical services by providing coverage to the elderly and poor.
• When there is more demand for services, the market price goes up, as long as supply remains constant.

• The number of uninsured people in the United States is 35 million.
• Uninsured people often seek care from emergency rooms and clinics, which raises costs in two ways.
• Emergency care is more expensive than routine care.

• Waiting until one has an acute condition that requires immediate attention often requires more treatment than would be done with preventive care or an early diagnosis.
• An insured person who develops a cough with a high temperature is likely to see a doctor.
• If the patient has bronchitis, a few days of medicine and rest will do the trick.
• Uninsured people who develop bronchitis are less likely to seek medical help and are more likely to develop a more serious condition, such as pneumonia, which can be difficult and costly to treat.

• When there is no competition, hospitals and other providers can charge what they want, and patients will have to pay.
• Many people don't take care of their health.

• Heroy end- of- life efforts are expensive.
• These efforts come at a steep price and may extend life for a few months, days, or hours.

• In the United States, no expense is spared in the effort to prolong life for a few days.
• The orange curve shows a society's aggregate health production function, a measure of health reflecting the population's longevity, general health, and quality of life.
• When small amounts of health care are provided, the function rises rapidly, but the benefits of additional care are smaller.
• Compare points A and B to understand why.
• A small amount of medical care is provided, but it has a large impact on health.
• The marginal product of medical care is the slope at point A.

• Higher medical care expenditures are unlikely to improve longevity and quality of life because many other factors, such as disease, genetics, and lifestyle, also play a key role in determining health, quality of life, and longevity.

• The slope of the health production function indicates that B medical care is higher at point A than point B.

• Over half of health retirement communities care expenditures are for nursing care facilities and continuing care.

• "National Health Expenditure clinics Data" can be found at cms.gov.

• It's not surprising that medical costs rise because extending life becomes more difficult.
• Society must answer two questions.

• The figure shows where the health dollar goes.
• Half of all medical expenses are spent on hospital care, sicians and clinics.

• After that, prescription drugs, dental care, home health care, and nursing homes represent smaller parts of healthcare expenditures.
• There is a contradiction here.
• Medical care has become more efficient as medical records are computerized and many procedures that used to take days of hospitalization can now be done on an outpatient basis.
• Reducing medical costs through efficiency gains is ongoing.
• Costs continue to rise.
• The incentives that patients, providers, and insurance companies face when making medical decisions are examined in the next section.

• Most other goods and services are similar to healthcare consumption.
• The situation creates a unique set of incentives and leads to distortion in the standard supply and demand analysis.
• It is important to understand how medical care is delivered and paid for, as well as the incentives that patients, medical providers, and insurers face when making decisions.

• Patients and the government are the biggest consumers of medical care.

• Medical care is demanded by patients.
• Medicare is a program that provides medical assistance to the elderly and Medicaid is a program that provides medical assistance to the poor.

• Over 40 million people are served by Medicare and Medicaid.
• The two programs account for a third of all medical spending in the United States.

• Millions of workers are employed in the medical care industry.
• There are over 500,000 medical facilities in this country, including small medical offices, large regional hospitals, nursing homes, and stores that supply medical equipment.
• In the United States, pharmaceutical companies make over $300 billion a year.

• In the event of a serious condition, medical insurance allows consumers to budget their expenses and limit what they will have to pay out of pocket.

• Copayments are used to share expenses with the insured.
• The copay serves to prevent most medical service or filling a prescription when you receive a copay to cover a small portion of the costs.

• Deductibles can sometimes be subject to exceptions, such as a visit to the emergency room or preventive before most of the policy's physician visits and tests.

• Copayments and deductibles work to encourage consumers to use medical services less often.

• The premiums, copayments, deductible, and policy's deductible are used by insurance companies to pay medical suppliers.

• Health Insurance and Health Care customers will need to go to the doctor.

• The company can estimate its costs in advance and set premiums that will generate a profit.

• HMOs provide managed care for their patients by assigning them a primary care physician who oversees their medical care.
• The primary care provider is monitored by the HMO.
• Revenue from premiums, copayments, deductibles, and coinsurance is earned by HMOs.
• The insured can make their own choices.

• Medical mal practice, or negligent treatment on the part of doctors, can be covered by an insurance company.
• If a doctor faces a malpractice claim, the doctor pays a set fee to the insurer, which in turn pays for legal damages.
• Insurers can estimate the probability that a particular physician will face a malpractice claim by analyzing the number of malpractice cases for each type of medical procedure performed each year.

• There are many pharmaceutical companies that develop the drugs used to treat a wide variety of conditions.
• The global pharmaceutical market is over $1 trillion.

• Billions of dollars are spent on the development and testing of potential drugs.
• A single drug can take a long time to develop.
• Before a drug can be sold, it must be approved by the FDA.
• The development cost, time required, and risk that a drug may turn out to be problematic or ineffective combine to make the development of new drugs an expensive proposition.

• The incentives that drive the decisions of the major players must be looked at to understand why medical costs are so high.
• Consumers want every treatment to be covered, providers want a steady stream of business and don't want to be sued for malpractice, and the insurance companies and pharmaceutical companies want to make money.

• The marginal cost of seeking medical treatment is low because patient copayments are only a tiny fraction of the total cost of care.

• Consumers demand more medical care.

• In order to earn more income and avoid malpractice lawsuits, some physicians prescribe more care than is medically necessary.
• The doctor suggests that you get more exercise after your physical.
• The gains from doubling your workout effort do not make you feel better.

• More of a good thing isn't always better.
• Quality of life is increased by physical activity.

• Lifting more weights or running more miles after a certain point does not increase your overall health because it simply maintains your health.

• A poorly designed incentive mechanism leads to escalating costs.
• In the case of Medicare and Medicaid, the government tries to control costs by setting caps on the reimbursements that are paid to providers for medical treatments.
• Government price setting forces physicians and medical centers to raise prices for procedures that are not covered by Medicare and Medicaid.

• Incentives are an important part of the delivery of medical care.
• There is a lack of information available to participants.

• Most of us don't know much about medicine.
• We seek medical attention when we don't feel well because we want to feel better.
• Poor judges of quality are because we know very little about the service we are buying.
• The party with limited information should be concerned about the quality of the other party's information in order to gain an advantage.

• Gathering better information is the only way to avoid an adverse outcome when one side knows more than the other.
• You need medical care if you are new in town.
• You don't have a chance to meet anyone and find out where to go for care.
• Ratemds.com provides patient feedback on the quality of care that they have received, which is a way to avoid the worst doctors.
• You can ask to be treated by doctors you know to be competent and have strong reputations, if you have knowledge from sources like these.
• New residents are helped avoid below average care by conducting research.
• It is important for patients to take charge of their own health care and learn all they can about a condition and its treatment so they are prepared to ask questions and make better decisions about treatment options.
• Adverse selection is minimized when patients are better informed.

• If buyers are more likely to need it, adverse selection applies.
• Consider a life insurance company.

• Before selling a policy to someone who is likely to die early, the insurance company has to gather more information about the person.

• Eligibility for full benefits can be delayed until it can be determined that the person has no health problems.
• The process of gathering information is important to minimize the risk of adverse selection.
• In automobile insurance, drivers with poor records pay higher premiums and drivers with good records pay lower ones.

• Doctors are trusted by patients to make good treatment decisions.
• The agent will be familiar with some non medical examples.
• The babysitter might talk on the phone instead of watching the children in a satisfac if the parents hire the agent.

• The agent might be more likely to grant favors to interest groups than to focus on the needs of the principal.

• Doctors and hospitals may order more tests, procedures, or visits to specialists than necessary in medicine.
• The doctor or hospital may be more interested in making money than ensuring the patient's health and well- being.
• In order to maximize profit, insurance companies may want to save on treatment costs.
• The objectives of the agents who deliver care conflict with the patient's desire for the best medical care.

• It implies that some people are at risk.

• This mentality can lead to inefficient outcomes, such as visiting the doctor more often than necessary.

• The moral hazard problem can be lessened by restructuring the incentives.
• A higher copayment will discourage unnecessary doctor visits for the patient.

• The incentive structure needs to be fixed to solve a moral hazard problem in medical care.
• Health insurance companies address moral hazard by encouraging preventative care.
• Payment limits are imposed on treatments for preventable conditions, such as gum disease and tooth decay.

• The employees are whipped into shape by the morning exercises.

• The amusing episode shows how well-intentioned moral hazard makes Homer decide to policies can be abused.

• When your sister's regular tutor is out of town, you hire a substitute tutor and agree to pay $40 up front for one intense tutoring session.

• Since you paid up front for a one- time session, the substitute tutor has less incentive to help compared with your sister's regular tutor, who expects repeat business and a tip.
• The moral hazard problem is reflected in the poor outcome.
• The substitute tutor doesn't have the same incentives as your regular tutor so you're more likely to slack off.

• You decide to use an online dating site, but you're not sure if the posted picture of someone is accurate.

• Adverse selection is being done.
• The person you are interested in knows more about themselves than you do.
• She would probably post a flattering picture of herself.

• When you are on spring break, you hire a friend to feed your cat and change the litter twice a day.
• Your cat uses your bedspread as a litter box because your friend only visits your apartment once a day.

• This is a good example of the agent problem.
• You can't tell how often your friend goes to your house because you are out of town.
• Your friend knows that cats are self sufficient and figures that you won't be able to tell how often she changes the litter.

• With a basic understanding of how the healthcare industry works and who the key players are, we can look at how demand and supply operate in the market for health care.
• When you need health care, it's not about the price, it's about getting the care you need.
• You can begin to understand why medical expenses have risen so rapidly when you consider this fact and the presence of third-party payments.
• Medical licensing requirements help explain why the supply of medical services is limited.
• Strong inelastic demand and limited supply push up prices for medical services.

• It doesn't have many good alternatives for health care.
• The demand for health care iselastic because of these two facts.
• When you need a heart transplant, going without one is not an option.
• A 2002 study by the RAND Corporation found that health care has an average price elasticity of 0.17.
• A 1% increase in the price of health care will result in a 0.17% reduction in healthcare expenditures.
• As an elasticity approaches zero, demand becomes more inelastic.
• The demand for medical care iselastic.

• There are situations in which healthcare expenditures can be reduced.
• Home remedies, such as drinking fluids and resting, can be used by healthy people with minor colds and other Viruses, instead of going to the doctor.
• The price elasticity of demand is determined by the severity of the medical need and the sense of urgency involved in treatment.
• The most inelastic demand is for urgent needs.
• The demand for health care becomes elastic as the time horizon expands.
• Treatments that are not emergencies have the greatest price elasticity.
• When a tooth goes bad, some people choose to have it removed, which is less expensive than root canals and crowns.

• Demand for health care has grown.
• Hearing aids, replacement joints, and assisted living and nursing home facilities are some of the expensive medical goods and services that demand increases as people live longer.
• Cancer and Alzheimer's disease are two of the illnesses that increase in an aging population.
• New technologies have made it possible to treat medical conditions that used to be impossible.
• Medical advances have improved the quality of life for many consumers, but they drive up demand for more advanced medical procedures, equipment, and specialty drugs.

• People who are risk averse generally choose to purchase health insurance because it protects them against the possibility of extreme financial hardship in the case of severe illness or other medical problems.

• The moral hazard problem is caused by the fact that insurance may distort their idea of costs and cause them to change their behavior.
• If an insurance policy does not require the patient to pay anything, or requires very little to see the doctor, the patient may wind up seeing the doctor more often than necessary.

• John Q's demand for this surgery is inelastic because the child will die without a transplant.
• John Q's insurance won't cover his son's transplant.

• It doesn't stop John Q from taking desperate steps.

• The situation is problematic on two fronts.

• No one wants a child to die of medical care because his family doesn't have health insurance.
• John Q pitals transfer the cost of treating the uninsured by takes matters into his own hands and takes the raising fees for the other services that they provide.

• Society picks up the tab for uninsured people to get a transplant.

• The film is about the costs and benefits of giving up one's life to provide a heart for transplant.

• The situation affects two patients.
• The full cost of medical care is not covered by insurance.

• The insurance policy requires a small copayment for medical care.
• They both get sick five times in a year.
• She will only go to the doctor's office three times because she pays the full cost of treatment.

• If he goes to the doctor's office five times, he will have to pay a total of $50.
• The rest of the cost is paid by the insurance company.

• The impact of a $10 copayment on healthcare costs is large.

• The consumer is responsible for the entire cost of an office visit if they don't have insurance.

• There is a need for a $100 medical care.

• The consumer has little reason not to seek medical attention even for minor problems that will respond to home treatment because the insurance companies are paying most of the cost.
• The lower copayment helps explain why insurance costs are so high.

• Consumers worry about the price, while producers worry about profits.
• As much as we might like to think that medical providers only care about our health, we must acknowledge that they are providing a service for which they expect to be paid.
• When the price goes up, healthcare providers are willing to provide more health care.
• Market power is enjoyed by producers of medical care.
• Licensing requirements affect the market by limiting the supply of certain healthcare providers.

• It takes a long time to become a skilled medical provider.
• Nurses must become registered before they can practice, and Health Insurance and Health Care licenses must be obtained from a medical board.
• There are restrictions on entering the medical profession that limit the supply of workers.

• There are barriers to entry into the medical profession.
• The wages of these medical workers increase when the quantity supplied decreases.
• Many medical facilities don't face competition.
• Many small communities have only one hospital.
• The nearest hospital is the default option for most patients in these cases.
• Because economies of scale are important in the provision of medical care, even large metropolitan areas tend to have only a few large hospitals.

• As the population base expands, larger hospitals can afford to offer more services than smaller hospitals can.
• The hospital needs to develop a particular expertise in order to provide certain services.
• The availability of specialized care is a good thing.
• Hospitals are able to charge higher fees as they become larger and more specialized.

• The Medicare and Medicaid programs hold the market power of suppliers in check.

• The supply of certain workers is limited by entering the medical profession.

• The insurance companies push back against certain medical charges by limiting the amount they reimburse.
• Lasik eye surgery is not typically reimbursed by insurance plans.
• Consumer demand is elastic for some services.
• Overall medical costs have gone up.

• Over the last 20 years, the quality of medical care around the globe has improved rapidly and international travel has become more convenient.
• A patient can have a cardiac surgery in India, a hip replacement in Egypt, and a face- lift in Brazil.
• The rapid growth of medical tourism is explained by supply and demand.
• Wealthy medical tourists from the United States look for better outcomes than they can get in their home country.
• The majority of people who seek medical care abroad do so for two reasons: cost and wait times.

• The cost of medical care is lower in a developing country than it is in a developed country.

• Health insurance is not readily available in many locations within developing countries, which leads to a policy of cash payment for healthcare services and also suppresses demand.
• There are long wait times for certain procedures.
• The United Kingdom and Canada are the top destinations for medical tourism.

• The main reason for medical tourism in the US is the lower cost.
• Many procedures performed abroad cost less than in developed countries.
• The cost of a transplant in the United States can be more than in Taiwan.
• The cost of knee and hip replacements in Panama and Costa Rica is a quarter of the cost in the United States, and some insurance plans offer incentives to have them done there.
• Patients agree to leave the country for this type of surgery because their insurance company will pay all their travel related expenses and waive the typical out of pocket expenses that would be incurred from copays and deductibles.

• Medical tourism has led to the creation of medical "safaris," where patients go to South Africa or South America for cosmetic surgery, stay in luxurious accommodations, and take in the savanna or rain forest while recovering.

• Suppose that the United States scraps its current healthcare system, and citizens are covered for all medical care with no copayments or deductibles.

• Each patient's out- of- pocket expense would be zero if there were no copayment or deductible.

• The amount of medical care demanded by each patient would increase from point A to point B.

• We apply what we've learned about health care.
• We compare the healthcare systems in the United States and Canada.
• There is a shortage of human organs for transplant.

• We live in a world of scarcity and rationing is a fact of life.

• Understanding how different rationing mechanisms are used in medical care is the simplest way to think about healthcare.
• The consumer's ability to pay is the primary rationing mechanism in the United States.
• A consequence of using prices to ration medical care is that close to 35 million U.S. citizens don't get medical care because they can't afford it.

• This doesn't mean that medical care there is unlimited.
• In Canada, there are wait times, fewer doctors, and limited availability of drugs.

• There is a trade off.
• The perfect set of incentives is not created by a medical system.
• In the United States, a large majority of citizens have the means to pay for medical care, have access to some of the best medical facilities in the world, and face relatively short wait times.
• Under the current U.S. system, access to the best facilities is limited and wait times for the poor are longer.
• The system of private health care makes it difficult to eliminate the differences between the rich and poor.

• In Canada, each citizen is treated equally, but access to immediate medi cal treatment is more restricted.
• Table 18.1 shows that Canada spends less than the United States per capita.
• There are many ways.
• The rates that are paid to medical providers are set by the government.
• Doctors are not allowed to have private practices.
• Hospitals get grants from the government to cover their costs.

• Canada's Health Act requires government funding for medically necessary share through taxes.

• 70% of all medical expenses are funded by the Canadian government, with the remaining 30% being generated by prescription medications, long- term care, physical therapy, and dental care.
• In the United States, private insurance is the same as it is in these areas.

• Patients seeking medical care in Canada are more likely to seek care in the US.
• You might think that this fact is odd.
• Canada has national health care and health services there are covered by the Canadian Health Act.
• There is a difference between access and availability.
• People with conditions that are not life threatening face long waits because of Canada's tight control over medical costs.

• It is helpful to compare our situation to other countries.

• The United States and Canada have different healthcare systems.
• 70% of all health-related expenses are paid by the government in Canada's single-payer system.
• The United States' system is mostly funded by the private sector and the government pays about half of health-related expenses.

• Health care is an example of trade-offs.

• The benefits and costs of a private versus a public source are discussed in the CIA World Factbook.

• Unlike humans, dogs in Canada don't have to wait for scans or treatment, but the pet owner has to pay the full cost.

• Every country's healthcare system was ranked by the WHO in 2000.
• France was the first to arrive.
• The United States finished 37 out of 192 nations.
• Researchers looked at health care in 19 industrialized nations.
• Again, France finished first.
• The United States was last.
• These findings continue to be confirmed by more recent studies.

• The French don't like the idea of socialized health care.

• People in both countries get private insurance through their employer.
• Patients can choose preferred providers in both healthcare systems.
• French citizens have health insurance at a higher rate than people in the United States.
• In France there is compulsory national health insurance and supplemental private insurance that most people purchase.
• France's mandatory national health insurance takes care of 70% of patient needs, and supplemental private insurance is quite affordable.

• The way coverage works for the sickest patients is different between the U.S. and French systems.
• The most serious conditions in France are completely covered.
• In the United States, patients' out- of- pocket expenses for the most serious conditions often require supplemental insurance, and experimental procedures and drugs are rarely covered.
• The French report that they are quite satisfied with their healthcare system, while similar surveys in the United States find a much more mixed reaction, with roughly half the population happy and the other half concerned.

• None of this is cheap.
• The average person in France pays 20% of their income to support the national healthcare system.
• French firms are reluctant to hire workers because they have to pay payroll taxes.
• Workers in the US pay more for medical care than they do in France because of the higher costs of private insurance and out of pocket expenses.

• The lower costs of providing medical care in France can be traced to the government's control of the amount of compensation that hospitals and providers receive.
• The French use monopsony power to control costs.
• In order to keep the system solvent, healthcare costs in France have risen rapidly, which has led to cuts in services.

• A lot of people donate blood to help save other people's lives.
• They make transplants and other surgeries possible.
• The same level of generosity does not apply to organ donations.
• Thousands of deaths occur each year because the quantity of replacement organs demanded exceeds the amount of replacement organs supplied.
• If people were allowed to sell organs, many deaths would be avoided.
• The National Organ Transplant Act of 1984 makes it illegal to do so in the United States.
• People can sell sperm, platelets, and ova if they want to.
• The prices determine who donates.
• The donors are not paid for their services.
• Two consequences have been created by this discrepancy.
• In the United States, more than 7,000 patients on transplant waiting lists die each year.
• The demand for human organs has created a billion dollar black market.

• The market for organs.
• A person's life can go on even if they have two kidneys and only one healthy one.

• There are risks associated with donation, including the surgery and recovery, as well as no longer having a backup organ.
• Since there are roughly 300 million spare kidneys in the United States, there is a large pool of potential donors who are good matches for recipients waiting for a transplant.

• The curve becomes a vertical line at point QS.
• Many people donate their organs to friends and family in need.
• Others participate in exchange programs in which they donate a kidneys to someone they don't know in exchange for someone else donating a kidneys to a friend or family member.

• Increasing prices would reconcile a shortage.
• An equilibrium market price of $15,000 is shown.
• If the sale of kidneys were legal in the United States, Econo mists estimated that this would be the market price.
• Thousands of people die each year waiting for a transplant.
• A lot of people have a low quality of life while waiting for a transplant.
• A black market for organ transplants has developed outside the United States because patients waiting for a transplant die without one.

• The supply of organs is limited due to restrictions on the sale of kidneys, as shown by Supplyrestricted.
• A black market develops with an illegal price.

• Doctors, hospitals, staff, and patients are required to circumvent the law when there is a shortage of organs.
• The black market price is higher than it would be if there was a market for human kidneys.

• A shortage of vital organs is caused by altruism not providing enough organs to meet demand.
• The supply of human organs must be rationed.
• It is a matter of efficiency if the rationing takes place through markets, waiting in line, or some other mechanism.
• Markets may be one way to prevent deaths.
• The ethical considerations are significant.

• If viable artificial organs can be created, the ethical dilemma is over.
• Medical science is making progress towards a solution to the organ shortage.
• If you're not comfortable with markets determining the price, remember that relying solely on altruism isn't enough.
• Incentives and behavioral economics are needed to increase the supply of organs.
• Tax deductions, college scholarships, or guaranteed health care for organ donors are some of the proposals along this line.
• In the event of death, people would be required to opt out of organ donations.
• The suggestions would reduce the ethical dilemma while still using the power of economics to save lives.

• The donor is paid to travel to a fertility clinic and receive hormone treatments.
• After the donor's ova are removed, they are fertilized in a laboratory and implanted into a woman who is infertile.
• The procedure works with a little luck.

• Depending on her track record as a donor, the donor gets between $5,000 and $15,000.

• There are risks to the procedure, including a high incidence of multiple births among recipients, as well as rare but potentially serious problems for donors.
• Everyone would not feel comfortable volunteering for surgery.
• The existence of a market allows a trade that can benefit both the donor and the recipient.

• Most transplants use organs from dead people.
• Live donors can give part of their organ to a needy recipient.
• Major surgery can take between 4 and 12 hours to complete.
• The recovery time for the donor is usually two to three months.
• There is still a shortage of live organs for transplant.

• The National Organ Transplant Act needs to be repealed.

• The move would establish a price that would eliminate the shortage.
• One way to increase donations would be to allow donors to claim a tax deduction equal to the value of the portion of the organ donated.

• The administrator of the wait list thinks that the officers wouldn't be so judgmental if one of their own had enough trouble getting people to volunteer.
• The doctor who it is.
• If donors learned that we do the transplant and that he is not driven, they would approve the transplant and save lives.
• By the end of the episode, we see that the economic and ethical most accept their fate within the current system.

• People often debate the merits of universal health care versus private medical care as if the issue involves just those two factors.
• The misconception that frames the political debate about health care obscures the important economic considerations at work on the micro level.
• The healthcare debate requires complex trade- offs and exists on many margins.
• Different healthcare issues affect how well our nation's overall healthcare system functions.
• The impact of third parties on the incentives that patients face complicates the analysis of supply and demand.

• In which society's overarching concern is how to best spend so large a amount of money, health care straddles the boundary between micro economic analysis, which focuses on individual behavior, and macroeconomics, which focuses on macroeconomics.

• Health decisions are part of our lives.

• We have created a primer to help you understand the law.

• The law does not create health insurance.

• Young adults can stay on their parents' plan.

• It was common for young adults to forgo health care due to low income.

• Most young adults qualify for federal subsidies or Medicaid through the Health Insurance Marketplace.

• Premium tax credits are available to Americans.
• The cost of insurance premiums was determined by the new health insurance exchanges.

• A wide range of new benefits must be included in all new plans sold on or off the marketplace.
• Rather than spread across just a few treatments at no additional out of pocket cost, these are shared more broadly across large groups of people.

• If you don't have coverage, you can use the Preventive care is much cheaper than addressing health insurance marketplace to serious medical issues too late, so this provision of buy a private insurance plan.
• If you don't, the ACA is intended to lower costs.

• The cost of insurance on or off for every month you are without health insurance is unaffected by the factors on your federal income tax return if you get an exemption or if you have a preexisting condition.

• Based on health status, the fee acts as a negative incentive.
• It's not possible to be dropped from ages people to sign up for insurance.
• The cost of coverage when you are sick.
• The changes spread your marketplace health insurance more evenly and encourage people to get scale.
• People who make less money.

• One out of every six dollars spent in the US is spent on medical care.
• Micro forces that lead to fundamental changes to the healthcare system will have a large impact on our economy.

• Efficiency and cost containment are the topics of the healthcare debate.

• Choices with difficult trade- offs are required for increases in longevity and quality of life.

• Consumers and producers face different incentives when making healthcare decisions because of the widespread use of insurance.
• When seeking medical care, consumers pay premiums up front and smaller copays.
• Insurance companies give the bulk of the revenue to producers.
• The result is a system in which consumers demand more medical care because they are insured and many providers have an incentive to order additional tests or procedures that may not be absolutely necessary.

• Incentives in healthcare delivery are affected by asymmetric information.
• Insurance companies try to structure their plans in a way that encourages patients to seek care when it's needed and also to seek preventative care.
• To achieve these goals, the companies can make many preventive care visits free and establish high copayments that will discourage unnecessary trips to the doctor.

• Third- party payments that lower out- of- pocket expenses to consumers give rise to a serious moral hazard problem in which patients demand more medical care than is medically advisable.
• The incentive structure needs to be fixed to solve a moral hazard problem.
• Many insurance companies encourage preventive care because it lowers medical costs.
• It explains why insurance companies impose payment limits.

• Medical expenses have risen rapidly because ofelastic demand and third party payments.
• The combination of third- party payments and inelastic demand for medical care increases the amount of medical care demanded and results in increased expenditures.
• All prices are equal as we learned previously.

• Licensing requirements limit the supply of key healthcare providers.
• Licensing requirements give an explanation for increased medical expenditures.
• Hospital charges are not subject to competitive pressures.
• There is only one hospital in many small communities.
• Providers can use market power to set prices.

• The government is the single buyer of most medical care under a single- payer system.
• The government uses its power to set compensation levels for providers below the market wage rate.

• Private healthcare systems ration medical care through prices.

• The supply of replacement organs is not enough to meet the demand.
• The National Organ Transplant Act of 1984 makes it illegal to sell most organs in the United States.

• Many deaths would be prevented if people were allowed to sell organs in legal markets.

• There is a supply related reason for the high medi problem.

• $300 erage can be extended by a medical specialist.

• If the following medical ser has a different policy that requires 25% co vices have elastic or inelastic demand, tell us.

• How an vive is considered in your answer.
• If the sale of kidneys were legalized, what would happen to the price and the number of moral hazard?

• A person wants a life insurance policy.

• There is a hospital in an isolated community.
• Next closest hospital is 2 hours away and the company requires a physical exam.
• You decide to buy a ticket for a concert but don't know if it's legit because you don't know where the hospital is in a major metropolitan area.

• He got his final payment from an insurance plan that cost $100 a month.

• You hire a teenager to mow your insurance lawn for $50 a month and you have to pay a 15% coinsurance.
• A consumer is traveling.
• The teenager is trying to make a decision.

• Determine the nomic implications for end- of- life care with an equation.

• The market for the two plans has characteristics.

• Human life is more safe.
• We live in a world of trade- offs and the higher the speed, the safer it is.
• An "infinite gain from safety features that help prevent value" means that the value is so high that accidents are survivable.
• Drivers medical paths are worth pursuing.
• The marginal cost of likely to take on hazardous conditions and care versus the amount of additional life that become involved in accidents must be considered when choosing a vehicle.
• They change their behavior when driving a car that is important at the end of life.
• The change in behavior is evidence of extraordinary medical efforts.

• Because the demand for medical care is very elastic, an isolated hospital with a lot of resources that can be diverted from monopoly power will charge more and offer more services.
• A similar returns.

• It is assumed that nations should try to make their own goods and services.

• We may be better off letting another nation produce the good and then trading for it later.
• We can produce better if we specialize in production for another good.
• An increase in international trade is beneficial to nations.

• The level of trade among the world's nations has increased over the past few decades.
• To show the extent of international trade, we begin this chapter with a look at global trade data.
• International trade affects the economy.
• We look at the reasons for trade barriers.

• The United States gets imports from all over the world.

• The world has increased both imports and exports over the past 75 years.
• This activity shows that economies around the globe are becoming more interdependent.

• The iPhone is a popular item.
• Germany, Japan, Korea, and the United States make parts for the iPhone.
• The phone is made in China, despite being designed by Apple in California.

• It takes thousands of miles of global shipping to get this item to anyone.

• There are many reasons for the modern trade explosion.

• The total world exports of goods and services are four times the size of the world GDP.
• The first thing we look at in this section is the growth in world trade.

• "Globalization" is a term that has gained traction in the past few decades as people have seen a deeper interdependence between world economies.

• We look at the trade data that shows general sentiment.

• We look at the total world exports over time.
• The data shows that world trade in goods grew from over a trillion dollars to over fifteen trillion dollars.
• Over 40 years, that's a tenfold increase.

• Since 2003 world goods trade has doubled.

• World trade is not just in market value.
• As a percentage of world output, it has grown.
• Not only are nations trading more, but they are also trading more of their GDP.
• This has more than doubled over the last 40 years, from less than 1% in 1970 to more than 25% in 2013).

• The second poorest nation in the Western Hemisphere is trying to escape poverty through international trade.
• Its real exports grew from $1.2 trillion to $4.2 trillion.

• The country has established "free zones" where companies can produce goods for export and avoid standard corporate tax rates.
• A lot of Nicaraguan companies pay a lot of taxes.
• These do not apply to output that a company exports to other nations.
• Some U.S. companies have taken advantage of production in these free zones.

• International trade helps nations prosper.
• While the free zones are increasing exports, the effect on domestic consumers may not be as positive.
• There is very little incentive to produce goods for blue jeans in Nicaragua because of the Levi- Strauss company producing many of its breaks.

• The United States is the largest economy in the world.
• Residents of Michigan buy oranges from Florida, while Floridians buy cars from Michigan.
• Even with the ability to produce and trade so much within the U.S. borders, the nation's participation in international trade has risen dramatically in recent years.

• U.S. exports grew from less than 5% to over 15% of GDP.
• Imported goods and services increased from 4% to over 16%.

• Even though real GDP grew by over 3% each year, these changes occurred.

• U.S. imports have been higher than U.S. exports.

• A nation has a positive balance if it exports more than it imports.

• The United States had a negative trade of over $2 trillion in goods and services in the year.

• Financial, travel, and education services are popular U.S. service exports.
• Think about the students in your classes who are not U.S. citizens in order to put a face on service exports.
• The United States exported $21 billion worth of education services.

• Inter national trade is affected by the business cycle.
• One type of U.S. service export is imports.

• During downturns, the trade deficit tends to shrink.
• The way imports and exports are calculated is reflected in this fluctuation.
• There is a strong relationship between trade and economic activity.

• The United States imported goods and services from more than 200 countries.
• The majority of goods imports came from 10 nations.

• The United Kingdom has $54 in goods imports from 10 nations.

• The U.S. has a $67 deficit with Japan.

• Cars, electronics, and medical instruments are some of the goods the United States imports from Japan.
• Financial and travel services are some of the services we export to Japan.
• The table shows the trade between the United States and Japan.

• The popular U.S. import from Japan is Sony PlayStations.

• There is a trade deficit.
• The trade balance is negative.

• This is a trade deficit.
• The trade balance is positive.

• There is a trade deficit.
• The trade balance is negative.

• Canada and Mexico were our chief trading partners in the past.
• Motor vehicles, oil, natural gas, and many other goods and services can be found in Canada.

• Coffee, computers, household appliances, and gold can be found in Mexico.
• We are trading more in volume with other countries because of the decrease in transportation costs.
• China's total imports are now $467 billion, up from $105 billion a decade ago.
• Chinese imports include electronics, toys, and clothing.

• Canada and Mexico buy the most U.S. exports.

• We export cars, car parts, and meat to Mexico.
• Major U.S. exports are financial and travel services.

• In this section, we explain how comparative advantage and specialization make it possible to achieve gains from trade between nations.
• We assume that the United States and Mexico only produce two items, clothes and food.

• Gains arise when a nation trades its output with a trading partner.
• In other words, if a nation wants to trade with another nation that has a lower opportunity cost, they should produce the goods that are the best for them.
• Trade leads to lower costs.

• The United States and Mexico produce both food and clothing.

• It makes sense that the United States will produce food because it is abundant in capital and skilled labor, but not so much in unskilled labor.
• Mexico, which is seen as abundant in unskilled labor, will specialize in clothing.

• Mexico can produce at any point along its PPF.

• Mexico chooses to operate along its production possibilities curve of 450 million articles of clothing and 150 million tons of food.

• Mexico would have to do without both clothing and food if the extreme were to happen.
• Mexico will prefer to operate somewhere between the two extremes.
• Mexico has 450 million articles of clothing and 150 million tons of food.
• The United States can produce 400 million articles of clothing and 800 million tons of food if it doesn't make any clothing.
• The United States would prefer to operate somewhere between 300 million articles of clothing and 200 million tons of food.

• The opportunity cost that each country faces when making these two goods must be looked at first to see if gains from trade are able to make both countries better off.
• Producing 150 million tons of food in Mexico means giving up 450 million articles of clothing.

• Each ton of food incurs an opportunity cost of three articles of clothing, yielding a ratio of 150:450, or 1:3, or 1 ton of food per three articles of clothing.
• Producing 200 million tons of food in the US means giving up 100 million articles of clothing.
• The ratio is 200: 100 or 2:1.
• The table shows the initial production choices for both nations.

• If the opportunity cost of the production of the two goods is different between the two countries, trade has the potential to benefit both.
• Finding a trading ratio between 1:3 and 2:1 is the key to making trade mutually beneficial.
• Mexico would be able to buy food from the United States at a lower cost than it would cost to produce it in Mexico.
• The United States would be able to get clothing from Mexico at a lower cost than it would cost to produce it domestically.

• The effects of a 1:1 trade agreement on frontier possibilities for each country is shown in Figure 19.6 The two countries can specialize in the same good if they trade.
• The United States and Mexico will both produce food.

• 400 million units of clothing are traded for 400 million tons of food.
• Mexico is shown in panel a. Mexico produces 900 million units of clothing.
• It exports 400 million units of clothing to the United States and imports 400 million tons of food from the United States in return.
• Mexico has 500 million lion units of clothing and 400 million tons of food.
• Mexico's production without trade was 450 million units of clothing and 150 tons of food.
• Mexico can consume 50 million more units of clothing and 250 million more tons of food thanks to specialization and trade.

• The United States is in panel b.
• The United States produces 800 million tons of food.
• It imports 400 million units of clothing from Mexico in return for exporting 400 million tons of food.
• The United States ends up with 400 million units of clothing and 400 million tons of food.
• 300 million units of clothing and 200 tons of food were produced in the U.S. without trade.
• The United States has been made better off by being able to consume 100 million more units of clothing and 200 million more tons of food.

• The benefits that Mexico and the United States enjoy are even more significant.

• 50 million units of clothing and 250 million tons of food can be traded between Mexico and the United States after Mexico specializes in clothing and trades with the United States.

• In this section, we look at how international trade encourages both economies of scale and increased competition, as well as how these factors can help an economy to grow.

• In the past decade, U.S. trade with mainland China has exploded, with goods imports reaching $467 billion a year and exports up to $124 billion.
• We consider a production frontier for food and textiles in both China and the United States.

• The amount of textile production that is forgone for a single unit of food output is the opportunity cost of food production in China.
• The opportunity cost of 1 unit of food is 2 textile units because a Chinese worker can produce 2 textile units in a day.

• A worker in the United States can make 3 textile units and 9 food units in a day.
• 1/3 textile unit is the opportunity cost of 1 unit of food.

• The amount of food production that is forgone for a single textile is the opportunity cost of textile production in China.
• The opportunity cost of 1 textile unit is 1/2 unit of food because a Chinese worker can produce 1 unit of food in a day.

• A worker in the United States can produce 9 units of food in a day.
• 3 units of food is the opportunity cost of 1 textile unit.

• The United States has a lower opportunity cost of food production compared to other countries.

• China has a lower opportunity cost of textile production, so it has a comparative advantage in textile production.

• Once a smaller nation has free access to larger markets, it can effectively specialize in what it does best and generate low per-unit costs through exports.

• In the real world, access to new markets allows countries to take advantage of economies of scale and therefore lower per- unit costs as production expands.
• Increased production gives companies the chance to save money on distribution and marketing.

• Consider how a small textile company in Mexico fares.
• The company can expand into the United States with international trade.
• Added sales were created by this move.
• The textile firm can become more efficient with a larger volume of sales.

• The firm can purchase fabrics in bulk, expand its distribution network, and use volume advertising.

• Increased competition is a benefit from trade.
• Domestic firms are forced to become more innovative and compete in terms of both price and quality because of increased competition from foreign suppliers.
• Consumers can purchase a broader array of products that better match their needs because of competition.
• Many domestic cars are produced in the United States, but foreign cars are cheaper and offer more variety to U.S. consumers.

• Although international trade can be beneficial, countries often restrict trade.
• To create opportunities for freer trade, nations often reach trade agreements that specify the conditions of free trade.
• The North American Free Trade Agreement, signed in 1992, eliminated nearly all trade restrictions between Canada, Mexico, and the United States.
• The United States has trade agreements with 20 countries.

• Even though trade agreements often include protections for agriculture, they still increase trade between nations.
• As a result of the North American Free Trade Agreement, real U.S. imports and exports have doubled.
• In 1993, the United States exported $183 billion worth of goods to Canada, but this amount had risen to $312 billion by the end of the year.
• Mexico's exports grew from $80 billion to $240 billion over the same period.
• Canada's imports grew from $180 billion to $348 billion, and Mexico's grew from $76 billion to $294 billion.
• The reduction in trade barriers has allowed all three nations to move toward the production of goods and services in which they have a comparative advantage.

• The World Trade Organization facilitates trade agreements between nations.
• The WTO regulates the trade of various goods and services, including textiles, investment, intellectual property, and even agriculture.
• The WTO tries to resolve trade disputes.
• In 2012 the WTO helped to end a 20-year dispute between Latin American banana exporters and the European Union over a tax on imported bananas.

• Almost every shoe purchased in the United States is made overseas, but with few exceptions, the U.S. government taxes each pair of shoes that comes across its borders to be sold.
• A new pair of Nike tennis shoes imported from Vietnam is subject to a 20% import tax.
• The foreign producer has to pay a tax on the shoes if they are worth $100.

• It's not unusual for import taxes to be on footwear.
• We look at or restrain international whether or not it is effective.

• Imported goods and services pay a tariffs.

• We look at the relationship between domestic demand and domestic supply to see how tariffs affect the market price of shoes.

• Domestic supply and domestic demand would be in equilibrium at $140 per pair of shoes.
• If free trade prevails, this is not the market price.
• If trade is unrestricted, imports are free to enter the domestic market.
• Because trade is unrestricted, domestic producers can't charge a higher price than foreign producers can, so they can't sell their shoes at that price.
• The domestic price decreases to the world price of $100.
• QW is the total quan tity demanded at $100.
• This quantity is produced domestically and imported from foreign sources.

• The tariffs were dominated by imports.

• Domestic production expands from QD1 to QD2 when a tariffs is imposed.

• Increased producer surplus for domestic firms.

• Let's see what happens when a $20 per pair of shoes is levied.

• The cost that foreign producers have to pay when they export shoes goes up by $20 per pair, the amount of the tariffs.
• Supply goes down to Swith tariffs.
• The domestic price goes up from $100 to $120, reflecting the price with tariffs.
• Domestic producers don't have to pay the tariffs.
• The amount imported drops to QD2.
• The amount supplied by domestic producers increases along the domestic only supply curve from QD1 to QD2.
• Domestic suppliers are better off because they can charge more and sell more.

• Domestic suppliers gain producer surplus equal to the shaded area marked PS.
• The shaded area T shows the revenue the government gets from the tariffs.
• The total tax revenue is 20 times the number of imported pairs of shoes because the tariffs are $20 per pair.
• There are two areas of deadweight loss.
• Some people are forced to switch from foreign brands to domestic ones because of the higher price.
• Domestic producers can now enter the market.
• The efficiency loss associated with the tariffs is represented by Areas A and B.
• The loss in consumer surplus is greater than the gains obtained by producers and the government, so the economy as a whole loses from the tariffs.

• Consider for a second how damaging a tariffs can be.
• Foreign producers are the lowest cost producers of shoes, but they are limited in how much the United States buys from them.
• 7 countries buy more U.S.

• The United States and our major trade partners produce many items that Americans want.

• International Trade can be sold.
• This situation doesn't make sense from an import/export perspective.

• If foreign shoe manufacturers can't sell as many shoes in the US, they won't be able to use dollars to purchase U.S. exports.
• It also means higher shoe prices for U.S. consumers and less sales for U.S. exporters.

• The government doesn't receive any tax revenue, so the quota can be imported into exception.

• Milk, tuna, olives, peanuts, cotton, and sugar are some of the products that have a quota on them.

• The automobile industry in the 1980s and 1990s had a famous example of quota.
• Japan agreed to a voluntary quota on the number of vehicles it would export to the United States.
• Politics and economics are involved in the answer.
• Foreign producers don't have to apply a tariffs to their goods if they limit the quantity they supply.
• Foreign suppliers can charge higher prices because the quantity supplied is smaller.
• The result is that a voluntary quota makes financial sense if it helps a nation avoid a tariffs.

• The figure shows how a quota on foreign shoes would work.

• It is not an accident that the figure looks similar to Figure 19.7.

• There is a limit on the number of shoes that can be imported into the United States.
• The domestic price of shoes goes up from $100 to $120, reflecting the price under a quota.

• Because foreign producers have to abide by the quota, the amount imported drops to QQ - QD2 (where QQ represents the total quantity supplied after the quota has been imposed).
• The quantity supplied by domestic producers increases along the domestic only supply curve from QD1 to QD2.
• Domestic suppliers are better off because they can charge more and sell more.
• Domestic suppliers are indifferent between a quota and a tariffs because they have the same results.
• There are two areas of deadweight loss, A and B, in which consumers lose because the price is higher and some people are forced to switch from foreign brands to domestic ones.

• The deadweight loss in shaded areas A and B shows that a quota results in the same efficiency loss as a tariff.
• Foreign producers are not indifferent between a quota system and a tariffs.

• Domestic only by imports.

• At the free trade, imports fall to QD2.

• Inexpensive shoes face tariffs that are often 10 times or more than the average U.S. tariffs.
• A history lesson is needed to answer this question.

• In the United States, shoe manufacturers employed a quarter of a million workers.
• There are less than 3000 shoe workers today, and none of them assemble cheap shoes.
• The majority of shoe jobs have moved to low cost countries.
• The shoe tariffs were enacted to save domestic jobs.
• The protection isn't saving any jobs because not a single sneaker costing less than $3 is made in the United States.
• Cashmere sweaters, snakeskin purses, and silk shirts are not subject to import tariffs.
• Other examples include the 2.5% tariffs on cars, 4% and 5% tariffs for TV sets, and duty-free treatment for cell phones.

• The tax burden is passed on to those who are least able to afford it.

• The shoe tariffs is one of the United States' worst taxes.
• The shoe jobs disappeared a long time ago because it failed to protect the U.S. shoe industry.
• Consumers who are poor pay more in tax.
• The more feet in a family, the more shoes are needed.

• You might be surprised to learn that trade restrictions are common, considering that we have talked about the gains from trade and the inefficiencies associated with tariffs and quota.

• The Trade Federation tries to enforce its franchise by trying to intimidate Naboo, a small planet that believes in free trade and peace.

• Queen Amidala, the leader of the Naboo, doesn't want a war.

• She returns home and prepares money for the Republic after they discover that credit-based is ineffectual.
• The Jedi are forced to defend their country.

• A com is sent to broker a deal between Naboo and one of the Jedi and a Trade Federation, but they get stranded on Tatooine.
• Tatooine is a desert planet located in the Outer Rim.
• In the institutions, economies of scale and competition Outer Rim are necessary ingredients for trade to succeed.

• Weapons, energy, and transportation are some of the industries that are vital to our nation's defense.
• Without the ability to produce its own missiles, firearms, aircraft, and other strategically significant assets, a nation could find itself relying on its enemies.
• Some people argue that certain industries should be protected.

• This argument has been used to justify trade restrictions on goods and services from friendly nations with whom we have active, open trade relations.
• In 2002, the United States imposed tariffs on steel imports.
• Steel is an essential resource for national security and policymakers argued that the steel tariffs were necessary.
• Canada and Brazil are traditional allies of the United States.

• It was argued that the U.S. steel industry needed some time to implement new technologies internationally.

• The trade restrictions can be removed once the industry gains traction and can support itself.

• Reality doesn't work that way.
• Firms that lobby for protection operate in established industries.
• The steel industry in the United States is over 100 years old.
• Finding ways to remove trade barriers is difficult because they are often popular.

• When helping to establish the steel, sugar, cotton, or peanut industries was a good idea, it was based on the argument for helping new industries.
• For over 100 years, the tariffs that protect those industries have remained in one form or another.

• In 2009, the U.S. imposed tariffs on radial car tires from China.
• After three years, these tariffs were phased out.

• Dumping is a deliberate effort to get a foothold in a foreign market.
• It can be the result of subsidies in its home country.

• In 2009, the United States imposed a tariffs on radial car tire imports from China.
• In one quarter, imports of these tires dropped from 13 million to just 5.6 million.

• The average price of tires from all other nations rose from $53.94 to $62.05.

• The producers of tires from all over the world won.
• The tire producers in other nations weren't affected by the tariffs because they were targeted at a single nation.
• Chinese tire producers realized an average of $8 more per tire.
• The tire tariffs produced some tax revenue.

• U.S. tire consumers saw prices rise by about $8 per tire or $32 for a set of four tires.

• Whenever a foreign entity decides to charge a lower price to penetrate a market, the country that is dumped on is likely to retaliate by imposing a quota or tariffs to protect its domestic industries from foreign takeover.

• Trade barriers can cause domestic prices to go up and lead to a lower quantity of goods and services in the market.
• This situation doesn't protect consumers.
• Domestic producers are protected from international competition.
• Steel and tire tariffs were put in place to help domestic tire producers.

• National security, infant industry protection, and retaliation for dumping are some of the reasons we have already discussed.
• These barriers may be put in place as a favor to special interest groups that have much to gain at the expense of domestic consumers.
• U.S. consumers pay twice as much for sugar as the rest of the world because of sugar import regulations.
• U.S. consumers paid more than $3 billion in sugar tariffs and quota costs in the past year.
• A special interest gain is at the expense of U.S. consumers.
• It would not persist if a tax was transferred from consumers to producers.
• The federal budget doesn't show this kind of favor.

• The misconception was that nations shouldn't trade for goods and services that they can produce for themselves.
• The concept of comparative advantage shows that nations can gain by specializing in the production of goods and services for which they have the lowest cost and then trading for the other goods and services that they want to consume.

• International trade is growing.
• Increased trade is positive for all nations.
• National security, the protection of infant industries, retaliation for dumping and subsidies, and favors to special interests are some of the reasons trade still exists around the globe.

• Since 1970, world exports have grown by 25%.
• Over the past five decades, imports and exports have grown in the United States.
• U.S. exports grew from less than 5% of GDP in the 1960's to more than 15% in the 1980's.
• U.S. imports grew from 4% of GDP to over 16%.
• The world economy is getting more integrated.

• Gains from trade occur when a nation specializes in production and exchanges output with a trading partner.
• Each nation must produce goods for which it is a low-opportunity- cost producer and then trade them for goods for which it is a high-opportunity- cost producer in order for this arrangement to work.

• Increased international competition and economies of scale are benefits of trade.

• There are trade restrictions such as tariffs and quotas.
• A quota is a quantity restriction on imports.

• The need to protect defense- related industries and upstart firms is one of the reasons for trade restrictions.
• Protectionist policies can be used as political favors.

• The volume of imports is reduced by tariffs.

• Consider the following table for Mangolia: 1 mango and 2 cans of sardines.

What is the cost of making beer? What are the possibilities for workers in each country?

• Cars or 10 cases of beer per week are based on your answers.

Which nation has a comparative advan principle?

• Explain your answers if you want to know if each statement is true.

What quantities are used in Japan's competition?

• They agree to return to scale.

• Trade is built because of 20 7 8 and 14 7 10.

• Japan has a comparative advantage in car application of comparative advantage because of the process.
• Germany has a greater variety of goods and services from a comparative advantage in beer produc abroad than they could produce on their own.

• Japan has more competition than would exist without trade.

• Each party must benefit from the terms of trade or they won't agree to it.

• Phang Kim Shan is on the left and Pg is on the right.

AP Photo/Reed Saxon

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• Alex Belomlinsky/iStock photo; Alamy; Pg.
• Wikimedia Commons; Dreamstime.com.

• Teraberb is on Dreamstime.com and Alex Belomlinsky is on iStockphoto.

• (c) eddie linssen/ photo.com Ragoarts is the stock photo on the bottom.
• Steve Shepard/iStockphoto.com is the owner of the Silver Pictures/The Kola Collection.
• Steve Shepard/iStockphoto.com is in the right row.
• Ljupco Smokovski is in the top 2nd row.
• There is a stockbyte on the left and a Pg on the right.

• All rights are reserved by Miles NIC BOTHMA/ Newscomm.
• John Pomeroy's photos can be found at http://www.flickr.com/photos.

• The bottom left corner has 222 written on it.
• Stephen Ausmus is from the ARS/USDA.
• Dreamstime.com has a picture of Versluis Vplut.

• iStockphoto.com; Pg.
• There is a photo.com on the bottom left.

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Document Outline

• Cover (Principles of Microeconomics)

• Front Matter Half Title Title Page Copyright Dedication Brief Contents Contents Preface Acknowledgments About the Authors

• Part I - Introduction 1 - Five Foundations of Economics What Is Economics? What Are Five Foundations of Economics? Conclusion 2 - Model Building and Gains from Trade How Do Economists Study the Economy? What Is a Production Possibilities Frontier? What Are the Benefits of Specialization and Trade? What Is the Trade-off between Having More Now and Having More Later? Conclusion Appendix 2A: Graphs in Economics Graphs That Consist of One Variable Graphs That Consist of Two Variables Cautions in Interpreting Numerical Graphs

• Part II - The Role of Markets 3 - The Market at Work: Supply and Demand What Are the Fundamentals of Markets? What Determines Demand? What Determines Supply? How Do Supply and Demand Interact to Create Equilibrium Conclusion Appendix 3A: Changes in Both Demand and Supply 4 - Elasticity What Is the Price Elasticity of Demand, and What Are Its Determinants? How Do Changes in Income and the Prices of Other Goods Affect Elasticity? What Is the Price Elasticity of Supply? How Do the Price Elasticities of Demand and Supply Relate to Each Other? Conclusion 5 - Market Outcomes and Tax Incidence What Are Consumer Surplus and Producer Surplus? When Is a Market Efficient? Why Do Taxes Create Deadweight Loss in Otherwise Efficient Markets? Conclusion 6 - Price Controls When Do Price Ceilings Matter? What Effects Do Price Ceilings Have on Economic Activity? When Do Price Floors Matter? What Effects Do Price Floors Have on Economic Activity? Conclusion 7 - Market Inefficiencies: Externalities and Public Goods What Are Externalities, and How Do They Affect Markets? What Are Private Goods and Public Goods? What Are the Challenges of Providing Nonexcludable Goods? Conclusion

• Part III - The Theory of the Firm 8 - Business Costs and Production How Are Profits and Losses Calculated? How Much Should a Firm Produce? What Costs Do Firms Consider in the Short Run and the Long Run? Conclusion 9 - Firms in a Competitive Market How Do Competitive Markets Work? How Do Firms Maximize Profits? What Does the Supply Curve Look Like in Perfectly Competitive Markets? Conclusion 10 - Understanding Monopoly How Are Monopolies Created? How Much Do Monopolies Charge, and How Much Do They Produce? What Are the Problems with, and Solutions for, Monopoly? Conclusion 11 - Price Discrimination What Is Price Discrimination? How Is Price Discrimination Practiced? Conclusion 12 - Monopolistic Competition and Advertising What Is Monopolistic Competition? What Are the Differences among Monopolistic Competition, Competitive Markets, and Monopoly? Why Is Advertising Prevalent in Monopolistic Competition? Conclusion 13 - Oligopoly and Strategic Behavior What Is Oligopoly? How Does Game Theory Explain Strategic Behavior? How Do Government Policies Affect Oligopoly Behavior? What Are Network Externalities? Conclusion Appendix 13A: Two Alternative Theories of Pricing Behavior The Kinked Demand Curve Price Leadership

• Part IV - Labor Markets and Earnings 14 - The Demand and Supply of Resources What Are the Factors of Production? Where Does the Demand for Labor Come From? Where Does the Supply of Labor Come From? What Are the Determinants of Demand and Supply in the Labor Market? What Role Do Land and Capital Play in Production? Conclusion 15 - Income, Inequality, and Poverty What Are the Determinants of Wages? What Causes Income Inequality? How Do Economists Analyze Poverty? Conclusion

• Part V - Special Topics in Microeconomics 16 - Consumer Choice How Do Economists Model Consumer Satisfaction? How Do Consumers Optimize Their Purchasing Decisions? What Is the Diamond-Water Paradox? Conclusion Appendix 16A: Indifference Curve Analysis Indifference Curves Properties of Indifference Curves Using Indifference Curves to Illustrate the Consumer Optimum Conclusion 17 - Behavioral Economics and Risk Taking How Do Economists Explain Irrational Behavior? What Is the Role of Risk in Decision-Making? Conclusion 18 - Health Insurance and Health Care What Are the Important Issues in the Healthcare Industry? How Does Asymmetric Information Affect Healthcare Delivery? How Do Demand and Supply Contribute to High Medical Costs? How Do Incentives Influence the Quality of Health Care? Conclusion 19 - International Trade Is Globalization for Real? How Does International Trade Help the Economy? What Are the Effects of Tariffs and Quotas? Conclusion

• Glossary

• Credits

• Index