Economics Key Concepts: Scarcity, Market Dynamics, and Policy Effects

What is scarcity?

Scarcity is the limited nature of society's resources.

Difference between micro and macro economics?

Micro studies households and firms; Macro studies economy-wide phenomena.

What is opportunity cost?

The value of what you give up to get something else.

What's the trade-off between efficiency and equality?

Efficiency maximizes output; equality distributes it fairly.

What principle explains small decision changes?

Rational people think at the margin.

Why do people respond to incentives?

Changes in costs or benefits alter behavior.

What is market failure?

When a market fails to allocate resources efficiently.

What causes market failure?

Externalities or market power.

What determines living standards?

Productivity.

What is the circular flow diagram?

Model showing money and goods flow between households and firms.

What does the PPF show?

All combinations of two goods that can be produced with resources.

What causes the PPF to shift outward?

Economic growth or technological improvement.

What is a positive statement?

A factual claim describing what is.

What is a normative statement?

A value-based claim describing what should be.

What is the law of demand?

When price rises, quantity demanded falls.

What is the law of supply?

When price rises, quantity supplied rises.

What causes a shift in demand?

Changes in income, tastes, related goods, expectations, or number of buyers.

What causes a shift in supply?

Changes in input prices, technology, expectations, or number of sellers.

What is equilibrium?

The point where quantity demanded equals quantity supplied.

What is a surplus?

When quantity supplied exceeds quantity demanded.

What is a shortage?

When quantity demanded exceeds quantity supplied.

What does price elasticity of demand measure?

Responsiveness of quantity demanded to a change in price.

What makes demand more elastic?

More substitutes, luxuries, longer time horizon.

What happens to total revenue when price rises and demand is inelastic?

Total revenue increases.

What is income elasticity?

Percent change in quantity demanded divided by percent change in income.

What is cross-price elasticity?

Percent change in quantity demanded of one good divided by percent change in price of another good.

What is a price ceiling?

A legal maximum price; can cause a shortage.

What is a price floor?

A legal minimum price; can cause a surplus.

Example of a price floor?

Minimum wage.

What is tax incidence?

How the burden of a tax is shared between buyers and sellers.

Who bears more tax burden?

The side of the market that is less elastic.

What is consumer surplus?

Willingness to pay minus price; area under demand curve.

What is producer surplus?

Price minus cost; area above supply curve.

What is total surplus?

Consumer surplus plus producer surplus.

What does efficiency mean?

Maximizing total surplus.

What is deadweight loss?

Loss in total surplus due to tax or market distortion.

When is deadweight loss larger?

When supply or demand is elastic.

When is deadweight loss smaller?

When supply or demand is inelastic.

What is government tax revenue?

Times quantity sold (T × Q).

What happens to revenue when taxes are very large?

It eventually falls as trade decreases.

What does a supply and demand graph show?

The relationship between price and quantity; equilibrium occurs where S and D intersect.

What happens when a price ceiling is below equilibrium?

It creates a shortage; quantity demanded exceeds quantity supplied.

How do you find consumer surplus on a graph?

The area below the demand curve and above the price line.

Where is producer surplus on a graph?

The area above the supply curve and below the price line.

How does a tax appear on a supply-demand graph?

As a wedge between the price buyers pay and sellers receive; creates deadweight loss triangles.

What happens to total surplus after a tax?

It decreases; part becomes government revenue and part becomes deadweight loss.

How does elasticity affect deadweight loss?

The more elastic supply or demand, the larger the DWL.

What does the PPF curve represent?

All combinations of two goods that can be produced; bowed shape shows increasing opportunity cost.

What causes the PPF to shift outward?

Economic growth or technological progress.

In the labor market, what does a minimum wage above equilibrium cause?

A surplus of labor (unemployment).