Theme 1 practicing chains of analysis

Rational Decision Making

Why consumers may fail to maximize utility (Bounded rationality/Computation weakness).

Price Mechanism

How (SIR) Signalling, Incentive, and Rationing functions clear a market surplus or shortage of supply or demand.

Analysis: state changes in D/S, explain the functions in order of SIR, then explain result of new market equilibrium and successful resource allocation.

Consumer Surplus/Producer Surplus

How a price change shifts these (and the impact on economic welfare).

Negative Externalities (Production/Consumption)

How MSC > MPC leads to overconsumption and Welfare Loss.

Positive Externalities (Production/Consumption)

How MSB > MPB leads to underconsumption and Potential Welfare Gain.

Public Goods

Why the Free Rider Problem leads to the non-existance of a market (Market Failure).

Information Gaps

How Asymmetric Information leads to adverse selection (e.g., used car market).

Indirect Taxes

How a tax increases costs, shifts Supply left, and internalizes an externality.

Subsidies

How a subsidy lowers costs, shifts Supply right, and increases the quantity toward the socially optimum level.

Maximum Prices (Ceilings)

How they create excess demand (shortages) and black markets.

Minimum Prices (Floors)

How they create excess supply (surpluses), specifically in agriculture or labor.