Reading Guide

Chapter and sections in Taylor to Read Pg # Comments/Assignment
1 The Interconnected Economy 1

What Is an Economy? 2 Read – Important

Market-Oriented vs. Command Economies 2
The Interconnectedness of an Economy 2
The Division of Labor 4

Why the Division of Labor Increases Production 4
Trade and Markets 5
The Rise of Globalization 5
Microeconomics and Macroeconomics 7

Microeconomics: The Circular Flow Diagram 7
Macroeconomics: Goals, Frameworks, and Tools 10
Studying Economics Doesn’tMean Worshiping the Economy 10
Key Concepts and Summary 12
Review Questions 13 optional
2 Choice in a World of Scarcity 15

Choosing What to Consume 16 Read

A Consumption Choice Budget Constraint 16
How Changes in Income and Prices Affect the Budget Constraint 18
Personal Preferences Determine Specific Choices 18
From a Model with Two Goods to the Real World of Many Goods 20
Choosing between Labor and Leisure 20

An Example of a Labor-Leisure Budget Constraint 20
How a Change in Wages Affects the Labor-Leisure Budget Constraint 20
Making a Choice Along the Labor-Leisure Budget Constraint 22
Choosing between Present and Future Consumption 22

Interest Rates: The Price of Intertemporal Choice 23
The Power of Compound Interest 24
An Example of Intertemporal Choice 25
Three Implications of Budget Constraints: Opportunity Cost, Marginal Decision-Making, and Sunk Costs 26 Read-Important

Opportunity Cost 26
Marginal Decision-Making and Diminishing Marginal Utility 28
Sunk Costs 29
The Behavior of Profit-Seeking Firms 29 Read

Defining Profits 29
Why Earning High Profits Isn’t Easy 30
The Production Possibilities Frontier and Social Choices 30 Read-Important

The Shape of the Production Possibilities Frontier and Diminishing Marginal Returns 32
Productive Efficiency and Allocative Efficiency 34
Why Society Must Choose 35
Confronting Objections to the Economic Approach 35

A First Objection: People, Firms, and Society Don’t Act Like This 35
A Second Objection: People, Firms, and Society Should’t Do This 37
Facing Scarcity and Making Trade-offs 38
Key Concepts and Summary 38 review
Review Questions 40 optional
3 International Trade

41

Absolute Advantage 43 Read-Important

A Numerical Example of Absolute Advantage and Trade 43
Trade and Opportunity Cost 46
Limitations of the Numerical Example 47
Comparative Advantage 48

Identifying Comparative Advantage 48
Mutually Beneficial Trade with Comparative Advantage 50
How Opportunity Cost Sets the Boundaries of Trade 52
Comparative Advantage Goes Camping 53
The Power of the Comparative Advantage Example 53
Intra-industry Trade between Similar Economies 54 Skip for now – we will cover in a later Unit.

The Prevalence of Intra-industry Trade between Similar Economies 54
Gains from Specialization and Learning 55
Economies of Scale, Competition, Variety 56
Dynamic Comparative Advantage 57
The Size of Benefits from International Trade 57
From Interpersonal to International Trade 59
Key Concepts and Summary 60 review
Review Questions 60 optional