Fundamentals of Economics
The study of how people make choices under conditions of scarcity.
Economics
Why might a dangerous job pay more than a safe one, even if the skill level required in both jobs is similar?
Compensation Differentials
People take on more risk because they are protected from the consequences; in the insurance market, this problem is known as:
Moral Hazard
Why would allowing payment for kidneys likely increase the number of available donors? (try to use economic language about decision-making here).
The compensation would create stronger incentives
Which system encompasses fast, automatic, and intuitive thinking?
System 1
The “Hockey Stick of Human Prosperity” refers to what major historical trend?
Substantial economic growth after a long period of relative stagnation.
Over a longer period of time, does elasticity of supply usually become more or less elastic?
More elastic
Social Cost = ________ + _________
Private Cost + External Cost
A cause is emotionally compelling but extremely difficult to make progress on. Which EA factor is the issue?
Tractability
People often rely on mental shortcuts to make decisions quickly. What are these shortcuts called?
Heuristics
A country invests millions into building up its school system and improving teaching quality. Which prong of productivity is this targeting?
Human Capital
Wages are fundamentally a reflection of what economic reality?
Scarcity
1) Identify the market failure that occurs when individuals benefit from a good without paying for it, and 2) the type of good that is most vulnerable to this market failure.
Free-riders; public goods.
You accept a difficult job with long hours because your family is putting intense pressure on you to contribute financially now that you're 18. Your employer is unaware of these pressures and goes through your contract with you beforehand to make sure you understand the terms and conditions. Using the 2 base requirements of voluntariness, explain whether or not your taking the job is a voluntary transaction.
It is voluntary because there is no force (on the employer's end - pressure from outside influences would not be relevant here) and no fraud.
People consistently make mistakes in decision-making due to this limitation
Bounded rationality
What are the three key institutions that support economic growth?
Property rights, rule of law, and markets
Diffuse costs and concentrated benefits
A market structure with many firms selling slightly differentiated products.
Monopolistic competition
Which philosophy of fairness suggests we discern fairness behind a “veil of ignorance”?
Liberal Contractarianism
You think plane crashes are common because you recently saw some in the news. This is an example of what?
Availability Heuristic
What are the three determinants of supply?
Productivity, input costs, and taxes/subsidies ("PIT")
What is 1 immediate outcome and 2 longer-term outcome of a price ceiling?
Immediate: shortage
Longer-term: decrease in quality, development of black market, inefficiency in deciding how to allocate scarce resources (official decides vs. first-come, first-served), producers leave the market, worsening the shortage
Why does imperfect information generate a market failure? (be sure to define market failure in your answer).
People avoid transactions that would be beneficial overall, so the socially optimal number of exchanges doesn't occur, even though each individual is acting rationally given what information they have.
Which philosophy of fairness prioritizes freedom and voluntary exchange over outcomes?
Libertarianism
Why are nudges considered “libertarian”?
They preserve choice