WBW 1st Half

Economics

The study of how societies provide for their material well-being through the organization of production, distribution, and consumption.

Division of Labor

The specialization of tasks and responsibilities among individuals or groups to increase efficiency and productivity.

Scarcity

The condition of limited resources relative to unlimited wants; psychologically, scarcity becomes more pronounced as societies grow wealthier and people become more aware of time and wealth constraints.

Economic Problem

Society's obligation to produce enough goods and services and allocate resources efficiently to enable further production.

Economic Institutions

Structures (like markets, governments, and traditions) that organize production and distribution.

Institutional Failure (Unemployment)

When systems fail to engage available labor in production, representing inefficiency in mobilization.

Fiat

Government regulation or command (e.g., price controls, rationing) as a method for resolving scarcity.

Volunteers

Altruistic resource provision during crises as a method for resolving scarcity.

Seniority

Allocation by rank or tenure as a method for resolving scarcity.

Meritocracy

Allocation based on skill, contribution, or achievement as a method for resolving scarcity.

Voting

Democratic decision-making for distribution as a method for resolving scarcity.

Tradition

Custom-based allocation methods as a method for resolving scarcity.

First Come, First Served (FCFS)

Sequential allocation as a method for resolving scarcity.

Markets

Allocation via price mechanisms as a method for resolving scarcity.

Traditional Economy

An economic system based on customs and long-standing practices; promotes stability but limits progress.

Command Economy

An economic system where central authority determines production and distribution; effective for rapid change but limits freedom.

Market Economy

A system in which resource allocation is guided by individuals' self-interest through price mechanisms.

Invisible Hand

Adam Smith's concept that individuals pursuing self-interest can unintentionally promote societal welfare.

Perfect Competition

A market with many buyers and sellers, identical products, and free entry/exit — leading to allocative and productive efficiency.

Equilibrium Price

The price where quantity supplied equals quantity demanded.

Consumer and Producer Surplus

Measures of welfare; their sum indicates total social welfare maximized under perfect competition.

Deadweight Loss (DWL)

The loss of efficiency when the equilibrium outcome is not achieved.

Invisible Hand (Caveat)

Works only under certain assumptions—complete information, no externalities, and competitive markets.

Market Failure

A situation where markets fail to allocate resources efficiently or equitably.

Contrived Monopoly Power

When firms control market prices without efficiency justification; harms consumers.

Public Goods

Goods that are nonrivalrous and nonexcludable.

Externalities

Uncompensated effects of production or consumption on third parties (negative or positive).

Information Asymmetry

When buyers and sellers have unequal information about a transaction.

Moral Hazard

When individuals engage in riskier behavior because they do not bear full consequences.

Adverse Selection

Market failure arising when one party cannot observe the quality or characteristics of a product before a transaction.

George Akerlof - "The Market for Lemons"

Explained how asymmetric information leads to market breakdown as low-quality goods drive out high-quality ones.

Arrow's Information Paradox

Information is valuable when private, but once shared, it loses exclusivity and measurable value.

Government Intervention

Policy action to correct market failures; must pass a cost-benefit test ensuring benefits exceed costs.

Self-Correcting Markets

Markets may naturally adjust to inefficiencies over time, reducing need for government interference.

Natural Monopoly

A market where one firm can produce at a lower cost than multiple firms due to economies of scale.

Antitrust Policy

Laws and regulations intended to promote competition and prevent monopolistic behavior.

Regulation

Direct government control of prices, output, or behavior to correct market failures.

Government Failure

When intervention worsens efficiency or equity due to costs, misaligned incentives, or information problems.

Too Big to Fail

A firm so large its failure would endanger the economy; justifies government bailouts but raises moral hazard concerns.

Positive Externality Example

Vaccinations or education — benefits spill over to others.

Negative Externality Example

Pollution — costs imposed on third parties.

Normative Analysis

Focuses on what should be done; prescriptive and value-based.

Positive Analysis

Focuses on explaining what is; descriptive and predictive of real-world outcomes.

Gini Coefficient

Numerical measure of income inequality: Gini = A / (A + B), where higher values indicate greater inequality.

Lorenz Curve

Graph showing cumulative income distribution across population percentiles.

Lorenz Curve Area Interpretation

The greater the area between perfect equality and actual curve, the higher the inequality.

Thomas Piketty

Argues inequality rises when the return on capital (r) exceeds economic growth (g); proposes high wealth taxation.

Auten & Splinter (2019)

Found that, after taxes and transfers, the U.S. top 1% income share has remained stable since the 1970s.

Pareto Improvement

A change that makes at least one person better off without making anyone worse off.

Pareto Optimum

A state where no further Pareto improvements are possible.

Equity vs. Efficiency

Economists prioritize efficiency (P = MC), often neglecting fairness concerns.

Equity

Fairness according to need/circumstance; Equality = identical treatment or distribution.

Progressive vs. Regressive Taxation

Progressive taxes increase with income; regressive taxes take a larger percentage from low-income earners.

Wealth vs. Income Inequality

Wealth inequality measures asset ownership; income inequality measures earnings distribution.

Thomas Malthus

Warned that population growth could outpace resources — an early resource allocation concern.

Economic Growth vs. Distribution Tradeoff

Policies promoting growth can widen inequality if returns to capital exceed labor income growth.

Ronald Coase

Argued that when property rights are well-defined and transaction costs are low, private bargaining can solve externalities without government intervention.

Pay-Ratio Rule

Topic: Congress should not rescind the pay-ratio rule.

For (Keep the Rule)

Promotes transparency, highlights wage inequality, and pressures corporations toward fairer pay structures.

Against (Rescind the Rule)

Adds costly red tape, misleads investors, and unfairly penalizes firms in industries with naturally wide pay gaps.

H-1B Visas

H-1B visas should be allocated by a market (not a lottery).

For (Market Allocation)

Ensures visas go to employers who value them most, reducing inefficiency and randomness; generates revenue.

Against (Lottery System)

Keeps access fair for smaller firms and prevents rich corporations from dominating; supports diversity and equity.

Technology vs. Malthus and Hardin

Technology can save us from Malthus and Hardin.

For

Innovation boosts efficiency and substitutes scarce resources; markets and tech historically overcome limits on growth.

Against

Resource and ecological limits persist; moral restraint and institutional reform—not technology—are the real solutions.

Bumble Bee Tuna Case

Bumble Bee did (or did not) engage in a deceptive act or practice in its marketing campaign.

For (Did engage)

Misleading sustainability or health claims violate consumer trust and FTC standards—constitutes deceptive advertising.

Against (Did not engage)

Marketing language was subjective ("puffery"), not factual deception; consumers weren't materially misled.

Carbon Emissions

To reduce carbon emissions, governments should impose a cap-and-trade regime (not a carbon tax).

For (Cap-and-Trade)

Guarantees an emissions cap, uses market incentives to cut pollution efficiently, and rewards low-cost abatement.

Against (Carbon Tax)

Simpler, transparent, and easier to enforce; predictable price signal encourages long-term green investment.

Invisible Hand - Assumption Caveat

Adam Smith's invisible hand works only when markets have perfect information, no externalities, and full competition.

Implementation Problems

Difficulties in executing government regulation, often due to cost, poor information, or unintended consequences.

Lorenz Curve (Expanded Interpretation)

A graph showing the cumulative share of income earned by cumulative population percentiles; the further from the equality line, the greater the inequality.

Lorenz Curve Area

The area between the equality line and actual Lorenz curve; used to calculate the Gini coefficient.

Progressive Taxation

A tax system where the tax rate increases as income increases.

Regressive Taxation

A tax system where low-income individuals pay a higher effective share of income than high-income individuals.

Economic Growth vs Distribution Tradeoff

Policies that promote economic growth may worsen income distribution if the gains accrue mostly to capital owners.