Economics – Review Flashcards (Exam 1 Notes)

Economics basics

• Economics: study of how societies allocate scarce resources to coordinate unlimited wants; micro (individual) vs macro (societal).

• Rational decision-making: comparing benefits and costs, often using marginal analysis (unit-by-unit).

• Sunk costs: past costs that should not influence current decisions.

Marginal analysis and decision rules

• Decision rule: add a unit if Marginal Benefit (MB) > Marginal Cost (MC); stop if MB < MC.

• Example: hire guards until MB no longer exceeds MC. Typically, MB declines with more units.

Economic forces and terminology

• Invisible hand (price mechanism): prices guide resource allocation based on consumer wants.

• Invisible handshake: social and historical forces.

• Invisible foot: laws and government actions.

• Positive economics: describes "what is"; Normative economics: prescribes "what should be".

Economic institutions, policy, and forces

• Economic institutions: structures (corporations, norms) shaping decisions.

• Economic policy: government actions to influence economic outcomes.

Economic history and evolution (high level)

• Evolution from Feudalism to Capitalism, where Adam Smith noted self-interest can enhance welfare; modern economies are often mixed.

Opportunity cost and the Production Possibilities Curve (PPC)

• Opportunity cost: the value of the next best alternative forgone.

• PPC: illustrates trade-offs between two goods given fixed inputs, technology, and full employment.

• Straight PPC: constant opportunity cost; Curved PPC: increasing opportunity cost (resources aren't perfectly adaptable).

• Points on curve: efficient; Inside: inefficient; Outside: unattainable.

• Growth: outward PPC shift due to input increase or tech improvement.

Demand and supply fundamentals

• Law of demand: inverse relationship between price and quantity demanded (downward slope due to substitution, income, diminishing marginal utility effects).

• Demand shifters: income (normal/inferior goods), related goods' prices (substitutes/complements), expectations, tastes, number of buyers.

• Law of supply: direct relationship between price and quantity supplied (upward slope).

• Supply shifters: input prices, technology, producer expectations, taxes/subsidies, number of sellers.

• Price changes cause movement along curves; non-price factors cause curve shifts.

Market outcomes: equilibrium, shortages, surpluses, and price controls

• Equilibrium: where quantity demanded (Qd) equals quantity supplied (Qs).

• Shortage: Qd > Qs (price rises to equilibrium).

• Surplus: Qs > Qd (price falls to equilibrium).

• Price ceiling: maximum price below equilibrium, causes shortages.

• Price floor: minimum price above equilibrium, causes surpluses.

Shifts and equilibrium dynamics (combined analysis)

• Demand increases: higher equilibrium price and quantity.

• Supply increases: lower equilibrium price and higher quantity.

• Both D & S shift right: quantity rises, price change is indeterminate without knowing relative shifts.

Quick reference concepts for exam prep

• Marginal analysis (MB vs MC) for optimal decisions.

• Distinguish curve shifts from movements along a curve.

• PPC points: efficient (on), inefficient (inside), unattainable (outside).

• Price signals coordinate behavior in markets; shortages/surpluses push toward equilibrium.

• Normative vs. positive statements.

Key formulas:

• Decision rule: MB > MC \rightarrow \text{do it}

• Shortage: Qd - Qs > 0

• Surplus: Qs - Qd > 0

• Equilibrium: Qd = Qs