yawp

What is scarcity and why does it force choice?

Scarcity means limited resources and unlimited wants, requiring people to make choices.

What is a trade-off?

Giving up one option to gain another.

What is opportunity cost?

The value of the next best alternative given up.

Why is opportunity cost always the next best alternative?

Because only the next highest-valued option is relevant when choosing.

Why do rational people respond to incentives?

Because incentives change costs and benefits of actions.

What is marginal analysis?

Comparing marginal benefit and marginal cost to make decisions.

Why does MB = MC determine optimal decision-making?

It’s the point where additional benefit equals additional cost.

What is efficiency vs equity?

Efficiency maximizes total surplus; equity concerns fairness.

Why can equity reduce efficiency?

Redistribution can reduce incentives and distort markets.

What does the PPF illustrate?

Scarcity, trade-offs, opportunity cost, and efficiency.

Why does a bowed-out PPF show increasing opportunity cost?

Resources are specialized and not equally efficient.

What causes the PPF to shift outward?

More resources, better technology, or growth.

What is absolute advantage?

Ability to produce more with the same input.

What is comparative advantage?

Ability to produce at lower opportunity cost.

Why does trade rely on comparative advantage?

Trade benefits both sides when each specializes in what they do at lower opportunity cost.

How do you determine specialization?

Compare opportunity costs: lower cost → specialize.

What is the law of demand?

Higher price → lower quantity demanded, all else equal.

Why does the demand curve slope downward?

Substitution, income effects, and diminishing marginal utility.

What shifts the demand curve?

Tastes, related goods, income, number of buyers, expectations.

What is the difference between change in demand and quantity demanded?

Change in demand shifts the curve; quantity demanded moves along the curve.

What is the law of supply?

Higher price → higher quantity supplied.

What shifts the supply curve?

Input costs, technology, expectations, number of sellers, related goods.

What is the difference between change in supply and quantity supplied?

Shifts vs movement along curve.

What is equilibrium?

The price where quantity demanded equals quantity supplied.

What happens when price is above equilibrium?

Surplus.

What happens when price is below equilibrium?

Shortage.

How do supply shifts affect price and quantity?

Increase supply lowers price and increases quantity.

How do demand shifts affect price and quantity?

Increase demand raises price and quantity.

Why is one variable indeterminate in a double shift?

Because the net effect on either price or quantity depends on relative magnitudes.

What is willingness to pay?

Max price a consumer is willing to pay.

What is consumer surplus?

WTP minus actual price.

What is producer surplus?

Actual price minus minimum acceptable price.

What is total surplus?

Consumer surplus + producer surplus.

Why is equilibrium efficient?

Total surplus is maximized at equilibrium.

What causes deadweight loss?

Any distortion preventing mutually beneficial trades.

What is market failure?

When markets fail to allocate resources efficiently.

What is a price ceiling?

A legal maximum price.

When is a price ceiling binding?

When set below equilibrium price.

Why do ceilings cause shortages?

Quantity demanded exceeds quantity supplied.

What inefficiencies do ceilings cause?

DWL, misallocation, wasted resources, low quality, black markets.

What is a price floor?

A legal minimum price.

When is a price floor binding?

When set above equilibrium.

Why do floors cause surpluses?

Quantity supplied exceeds quantity demanded.

What inefficiencies do floors cause?

DWL, misallocation of sales, wasted resources, high quality.

What is a quota?

A limit on quantity that can be sold.

What is a quota rent?

Difference between demand price and supply price at the quota.

What is a wedge?

Gap between price consumers pay and producers receive.

Why do quotas create deadweight loss?

They restrict mutually beneficial trade.

How do you calculate price elasticity of demand?

Percent change in quantity divided by percent change in price (midpoint formula).

What does elastic demand mean?

Elasticity > 1, quantity is sensitive to price.

What does inelastic demand mean?

Elasticity < 1, quantity is not sensitive to price.

How does elasticity affect total revenue?

Elastic → TR moves opposite price; inelastic → TR moves with price.

What factors make demand more elastic?

Substitutes, luxury goods, large budget share, time.

What does positive cross-price elasticity indicate?

Substitutes.

What does negative cross-price elasticity indicate?

Complements.

What does positive income elasticity indicate?

Normal good.

What does negative income elasticity indicate?

Inferior good.

Why is supply more elastic in the long run?

Producers can adjust inputs and production.

What makes supply inelastic?

Fixed inputs, difficulty of production.

What determines who bears the burden of a tax?

Relative elasticity of supply and demand.

Why does the more inelastic side bear more burden?

They cannot change quantity as easily.

What is tax revenue?

Tax per unit multiplied by quantity sold.

Why do taxes create deadweight loss?

They prevent some mutually beneficial trades.

When is deadweight loss zero?

When demand or supply is perfectly inelastic.

What is a tax wedge?

Difference between price buyers pay and sellers receive.

What is a proportional tax?

Same percent for everyone.

What is a progressive tax?

Higher income pays higher percent.

What is a regressive tax?

Lower income pays higher percent.

Why do countries trade?

Comparative advantage.

What happens when world price < domestic price?

The country imports and consumers gain.

What happens when world price > domestic price?

The country exports and producers gain.

How does a tariff affect the market?

Raises domestic price, reduces quantity, creates DWL and government revenue.

What is the difference between tariffs and quotas?

Quotas create quota rent instead of revenue.

What is the difference between explicit and implicit cost?

Explicit costs are out of pocket; implicit costs are opportunity costs.

What is economic profit?

Revenue minus explicit and implicit costs.

Why is accounting profit misleading?

It ignores implicit costs.

What is the optimal quantity rule?

MB = MC.

Why should sunk costs be ignored?

They cannot be recovered and don’t affect future decisions.

What is loss aversion?

People dislike losses more than they value gains.

What is overconfidence?

Overestimation of knowledge or ability.

What is framing?

Decisions change based on how information is presented.

What is bounded rationality?

People choose 'good enough' options to save mental effort.

What is marginal utility?

Additional satisfaction from one more unit.

What is diminishing marginal utility?

MU decreases as consumption increases.

What is a budget line?

All combinations of goods the consumer can afford.

What shifts the budget line?

Changes in income.

What rotates the budget line?

Changes in price.

What is MU per dollar?

MU divided by price.

What is the optimal consumption rule?

MU per dollar must be equal across goods.

What is the substitution effect?

Consumers substitute toward relatively cheaper goods.

What is the income effect?

Price changes alter real purchasing power.

What is the marginal product of labor?

Change in output from one more worker.

Why does MPL eventually fall?

Diminishing returns to a fixed input.

Why does MC eventually rise?

Diminishing marginal returns raise additional costs.

Why is ATC U-shaped?

AFC falls, AVC rises.

Where does MC intersect ATC?

At the minimum ATC.

What are economies of scale?

LRATC falls as output increases.

What are diseconomies of scale?

LRATC rises as output increases.

What makes a market perfectly competitive?

Many firms, identical products, free entry, price-taking behavior.

What does it mean to be a price taker?

Firms accept the market price and cannot influence it.