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UNIT 1 — Foundations

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.

UNIT 2 — PPF, Models, Trade

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.

UNIT 3 — Supply and Demand

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.

UNIT 4 — Surplus and Efficiency

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.

UNIT 5 — Price Controls and Quotas

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.

UNIT 6 — Elasticity

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.

UNIT 7 — Taxes

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.

UNIT 8 — International Trade

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.

UNIT 9 — Cost-Benefit & Behavioral Econ

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.

UNIT 10 — Consumer Theory

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.

UNIT 11 — Production and Costs

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.

UNIT 12 — Perfect Competition

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.
Why is MR = P for a competitive firm? ; Selling one more unit adds exactly the market price.
What is the shutdown rule? ; Shutdown if P < AVC.
What is the break-even condition? ; P = ATC.
Why do competitive firms earn zero economic profit in the long run? ; Free entry and exit.
Why is perfect competition allocatively efficient? ; P = MC.
Why is it productively efficient? ; Firms produce at minimum ATC.

UNIT 13 — Monopoly & Market Power

What gives a monopolist market power? ; Being the sole seller with no close substitutes.
Why is MR below the demand curve for a monopolist? ; Lowering price reduces revenue on all units.
Why does a monopoly create deadweight loss? ; It restricts output below the efficient level.
Why does a natural monopoly have declining ATC? ; High fixed costs and low marginal costs.
Why shouldn’t natural monopolies be broken up? ; Splitting raises costs and reduces efficiency.
What conditions are required for price discrimination? ; Market power, ability to segment markets, prevention of resale.
What is perfect price discrimination? ; Charging each consumer their exact willingness to pay.
Why does perfect price discrimination eliminate DWL? ; All mutually beneficial trades occur.
Why does perfect price discrimination eliminate consumer surplus? ; Producer captures all surplus.
What is a monopsony? ; A single buyer in a labor/resource market.
Why does a monopsonist hire fewer workers? ; To keep wages lower than competitive levels.