Microeconmics final

3 Big Ideas In Economics

People face trade-offs, opportunity costs matter, and rational people think at the margin

Positive

fact-based

Normative = opinion-based

3 Big Ideas In Economics

People face trade-offs, opportunity costs matter, and rational people think at the margin

What’s the role of models in economics?

Simplify reality to help explain and predict economic behavior.

What's absolute advantage?

Producing more with the same resources.

What's comparative advantage?

Producing at a lower opportunity cost.

Why trade?

Both sides can be better off even if one is better at everything.

What causes shifts in demand?

Income, tastes, prices of related goods, expectations, number of buyers.

What causes shifts in supply?

Input prices, technology, expectations, number of sellers.

What is equilibrium?

Where quantity demanded = quantity supplied.

What is price elasticity of demand?

How much quantity demanded changes when price changes.

What is the midpoint method?

A formula to calculate % change more accurately.

What is a price ceiling?

Max legal price (can cause shortages).

What is a price floor?

Min legal price (can cause surpluses).

What is tax incidence?

Who actually bears the tax burden—it depends on elasticity.

What's moral hazard?

People take more risks when they don’t bear full consequences.

What's adverse selection?

The side with less info gets the worse deal.

What is consumer surplus?

Willingness to pay - actual price.

What is producer surplus?

Price received - cost of production.

What is market efficiency?

Maximum total surplus.

What's deadweight loss?

Lost total surplus due to taxes or other market distortions.

What do tariffs do?

Raise domestic prices and reduce imports.

What’s a negative externality?

Harm to others (e.g., pollution).

What’s a Pigovian tax?

A tax to fix negative externalities.

What’s the Coase Theorem?

Private deals can fix externalities if there are clear property rights.

What’s a public good?

Non-rival and non-excludable (e.g., streetlights).

What’s the free rider problem?

People use a good without paying.

What's the tragedy of the commons?

Overuse of shared resources.

What's the trade-off in taxes?

Efficiency vs equity (fairness).

What links product and factor markets?

Firms sell products, buy resources (labor, capital).

What are compensating differentials?

Extra pay for risky or unpleasant jobs.

What’s the superstar effect?

Big rewards for top performers.

Human capital vs signaling?

HC = skills from education; Signaling = degree as signal of ability.

What is an efficiency wage?

Paying more to boost worker effort or loyalty.

What’s the difference in fairness views?

Utilitarian: Max total happiness

Rawls: Help the worst-off

Libertarian: Respect individual choices

What is diminishing marginal product?

Adding more of one input lowers extra output.

When should a firm shut

If price < average variable cost.