Basic Concepts
The fundamental economic problem that resources are limited while human wants are unlimited
Scarcity
Many firms, homogeneous products, free entry/exit, zero economic profit in the long run.
PC
Ed = %ΔQd / %ΔP
PED
Occurs when social benefit > private benefit (education is an example).
Positive Externality
What equation does this describe?
PxX + PyY = I; slope = -(Px/Py).
Budget Line
The value of the next-best alternative foregone when a choice is made
OC
One firm, high barriers to entry, price > MC, results in DWL
Monopoly
If income elasticity is greater than 0, the good is…
Normal
A good that is nonrival and nonexcludable.
Public Good
On a PPF, the slope equals…
OC of good x
Total Revenue minus Total Cost, including implicit costs.
Economic Profit
A monopoly practice of charging different prices based on willingness to pay or group.
Price Discrimination
If cross-price elasticity between goods A and B is negative, they are…
Complements
A situation where buyers and sellers have unequal information before a transaction occurs, leading to high-risk or lower-quality participants dominating the market.
Adverse Selection
Qd= 100 - 2P and Qs= 20 + 3P. What is equilibrium price?
16
The increase in total welfare from specialization and exchange.
Gains from trade
Many firms, differentiated products, free entry in the long run.
Monopolistic Competition
Demand is elastic if |Ed| is
greater than 1
A situation where hidden actions after a transaction cause excessive risk-taking.
Moral Hazard
If TR increases from 200 to 220 when Q rises from 5 to 6, what is MR?
20
Describes what is; objective analysis of facts.
Positive Economics
A few large firms, interdependent decision-making, often analyzed with game theory.
Oligopoly
Price rises from 8 to 12, quantity falls from 100 to 80. Compute Ed
5/9
The reduction in total surplus when the market outcome is inefficient.
deadweight loss
Tax incidence: if demand is more inelastic than supply, who bears more of the tax?
buyers