Microeconomics
Law of demand
As price increases, quantity demanded decreases, ceteris paribus
State the four components of aggregate demand
Consumption, investment, government spending, net exports
Define opportunity cost
The next best alternative foregone when a choice is made
Draw a supply and demand curve for a market
Give one example of a good with inelastic demand and explain why.
Medicine - it has few substitutes
What happens to total revenue when demand is inelastic and price increases?
Total revenue increases
What is the difference between the actual and potential output in an economy
Actual output is the current level of the real GDP, potential output is the maximum sustainable level of GDP if all resources are fully employed
What is a public good? Give an example
A good that is non-rivalrous and non-excludable, e.g., street lighting or national defense
Show and explain a price floor on a diagram
What’s a real-world example of a price ceiling?
Rent control
Define producer surplus
Difference between what producers are willing to accept and what they actually receive.
What is the difference between GDP and GNI
GDP measures the value of all goods and services produced within a country’s borders. GNI includes GDP plus net income from abroad (e.g., remittances and foreign investments)
What is the difference between nominal and real GDP
Nominal is not adjusted for inflation, real GDP is adjusted
Draw an AD/AS model showing long-run equilibrium
AD intersects SRAS and LRAS at full employment output
Why do governments subsidize certain goods or services? Give an example.
To encourage consumption of merit goods like education or healthcare
Name two types of government intervention in markets and their goals
Price ceilings (to help consumers), indirect taxes (to reduce negative externalities), subsidies (to encourage merit goods)
What is the difference between frictional and structural unemployment?
Frictional unemployment is short-term and occurs when people are between jobs. Structural unemployment is long-term and caused by changes in the economy that make some skills obsolete.
What is the difference between a movement along the demand curve and a shift of the demand curve?
A movement is caused by a change in the good's own price; a shift is caused by non-price factors like income, tastes, or the price of related goods
Illustrate a subsidy and explain its effects on market outcomes
Shifts supply rightward; lowers price for consumers and increases quantity consumed
How can unemployment affect individuals and society?
Individuals lose income and self-esteem; society faces lower output and higher government spending
Draw and explain a negative externality of production graph
Diagram has to show MSC > MPC, overproduction occurs compared to the socially optimal level; results in DWL
Using a diagram, show the impact of a decrease in AD on the economy
Shift of AD leftward; leads to lower output and possibly deflation; unemployment may rise
What is allocative efficiency
Allocative efficiency occurs when resources are distributed in a way that maximized society's welfare
Draw and explain a diagram showing the impact of a subsidy
A subsidy shifts the supply curve to the right (or downward), lowering the market price and increasing quantity. The government pays the difference between the original and new supply prices. The diagram shows government spending and increased consumer and producer surplus
Why might a government tax cigarettes? Explain the economic reasoning.
To reduce negative externalities like health costs and discourage consumption (market failure correction