The Basics

Question 1

What the F is Economics?

Answer 1

In one word: Choice

In a few words: The study of how people choose to manage scarce resources

Question 2

Scarcity

Answer 2

” Wants vs Constraints”

• Scarcity is the condition of wanting more than what we can get with the available resources
• People make decisions aimed at getting things they want with limited resources
• Time and money are also a limited resources

Question 3

Firm Decision Making

“​Four Questions”

Answer 3

1. What are the wants and constraints? (Concepts of scarcity)
2. What are the tradeoffs? (Opportunity costs)
3. How will others respond? (+/- Incentives)
4. Why isn’t everyone doing it? (Efficency)

Question 4

Circular Flow Diagram

Answer 4

Decisions are made by households and firms.

Goods, services and factors of production, like labor are the commodities that are utizled in the interations between households and firms

Question 5

Postitive Economics

Answer 5

• “What is happening”
• Objective and fact based
• Precise, descriptive and clearly measurable
• A positive statement can be verified against evidences or historical instances and can be approved or disapproved

Example: “Government-provided healthcare increases public expenditures”

Question 6

Normative Economics

Answer 6

• “What should be happening”
• Subjective and value based
• Expresses desirability or value aimed at achieving certain economic goals or outcome of public policies
• A normative statement is usually based on an opinion and remains a value judgment that originates from personal perspectives, feelings, or opinions involved in the decision making process.

Example: “Government should provide basic healthcare to all citizens”

Question 7

Efficiency

Answer 7

Mankiw: “The property of a resource allocation of maximizing the total surplus received by all members of society”

In layman’s terms: Society (not firms/markets) getting the most from its scarce resources

Example: A monopoly is not considered efficient because it doesn’t properly allocate societies resources!

Question 8

Opportunity Cost

Answer 8

The value of what one has to give up in order to choose something

Question 9

Marginal Decisions

Question 10

Incentives

Question 11

The Law of Demand

Answer 11

Price & Quantity Demanded have an inverse relationship

As price goes up, the quantity demanded goes down

As price goes down, the quantity demanded goes up

Question 12

The Law of Supply

Answer 12

Price & Quantity Demanded have a direct relationship

As price goes up, the quantity supplied goes up

As price goes down, the quantity supplied goes down

Question 13

Private Goods

Question 14

Public Goods

Question 15

Common Resources

Question 16

Natural Monopoly

Question 17

Perfectly Competitive Market

Question 18

Competitive Market

Answer 18

Competitive firm: When MR>MC the firm should increase output.

Question 19

Shortage

Answer 19

Question 20

Surplus

Answer 20

Question 21

Price Elasticity of Demand

Question 22

Elasticity

Question 23

What influences price elasticity of demand?

Question 24

Cross-Price Elasticity of Demand

Question 25

Elasticity of Supply

Question 26

Price Elasticity of Supply

Question 27

Price floor

Question 28

Price ceiling

Question 29

Consumer surplus

Answer 29

A measure of society’s economic well-being is total surplus (consumer surplus + producer surplus)

Question 30

Producer surplus

Answer 30

A measure of society’s economic well-being is total surplus (consumer surplus + producer surplus)

Question 31

Tax

Answer 31

Question 32

Subsidies

Question 33

Specialization

Question 34

Tariffs

Answer 34

Question 35

Negative externality

Answer 35

Question 36

Positive externality

Answer 36

Question 37

Excludability

Question 38

Rivalry in Consumption

Question 39

Types of Goods

Answer 39

Question 40

Explicit costs

Question 41

Implicit costs

Question 42

Economic Profit

Question 43

Accounting Profit

Question 44

Average Costs

Answer 44

Question 45

Marginal Costs

Answer 45

Question 46

Fixed Costs

Question 47

Variable Costs

Question 48

Compliments

Question 49

Subsitutes

Question 50

Graph of a Market ## Footnote Vs Graph of a firm

Answer 50

_Market_ * Supply & Demand * Externalities * PPF _Firm_ * Costs * Profits * Marginal Figures * Long/Short Run

Question 51

Deadweight Loss

Answer 51

To better understand why taxes cause deadweight losses, consider an example. Imagine that Mike cleans Mei’s house each week for $100. The opportunity cost of Mike’s time is $80, and the value of a clean house to Mei is $120. Thus, Mike and Mei each receive a $20 benefit from their deal. The total surplus of $40 measures the gains from trade in this particular transaction. Now suppose that the government levies a $50 tax on the providers of cleaning services. There is now no price that Mei can pay Mike that will leave both of them better off. The most Mei would be willing to pay is $120, but then Mike would be left with only $70 after paying the tax, which is less than his $80 opportunity cost. Conversely, for Mike to receive his opportunity cost of $80, Mei would need to pay $130, which is above the $120 value she places on a clean house. As a result, Mei and Mike cancel their arrangement. Mike loses the income, and Mei lives in a dirtier house.