Principles of Economics (Mankiw, 10th Edition) - Study Guide (Chapters 1-6)

Scarcity

Limited resources must be allocated efficiently.

Opportunity Cost

The value of the next best alternative foregone.

Marginal Changes

Small, incremental adjustments to decisions.

Incentives

Factors that motivate decision-making.

Market Economy

Allocates resources through decentralized decisions.

Market Failure

When markets fail to allocate resources efficiently.

Externalities

Uncompensated impact of one person’s actions on others.

Positive Statement

Descriptive, fact-based statement.

Normative Statement

Prescriptive, opinion-based statement.

Production Possibilities Frontier (PPF)

Graph showing possible production combinations.

Microeconomics

Study of individual decision-making.

Macroeconomics

Study of economy-wide phenomena.

Absolute Advantage

The ability to produce a good using fewer inputs than another producer.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Specialization

Focusing on the production of goods where comparative advantage exists.

Gains from Trade

Both parties benefit when they specialize and trade based on comparative advantage.

Demand Curve

Shows the relationship between price and quantity demanded.

Law of Demand

As price decreases, quantity demanded increases.

Supply Curve

Shows the relationship between price and quantity supplied.

Law of Supply

As price increases, quantity supplied increases.

Equilibrium

The point where supply and demand intersect.

Surplus

When quantity supplied > quantity demanded (price is too high).

Shortage

When quantity demanded > quantity supplied (price is too low).

Price Elasticity of Demand

Measures how much quantity demanded responds to price changes.

Elastic Demand

|E_d| > 1 (luxury goods, close substitutes).

Inelastic Demand

|E_d| < 1 (necessities, few substitutes).

Total Revenue (TR) and Elasticity

Increasing price decreases TR with elastic demand; increases TR with inelastic demand.

Price Elasticity of Supply

Measures how much quantity supplied responds to price changes.

Income Elasticity of Demand - Normal Good

Positive income elasticity.

Income Elasticity of Demand - Inferior Good

Negative income elasticity.

Cross-Price Elasticity of Demand - Substitutes

Positive elasticity.

Cross-Price Elasticity of Demand - Complements

Negative elasticity.

Price Ceiling

Legal maximum price (e.g., rent control).

Price Floor

Legal minimum price (e.g., minimum wage).

Tax Incidence

The burden of a tax shared between buyers and sellers.

Elasticity and Tax Burden

More inelastic side of the market bears more tax burden.

Effects of Taxes

Lowers quantity bought and sold and creates a deadweight loss (inefficiency).