Supply and Demand
What is the state in a market where the quantity of a good or service demanded by consumers equals the quantity supplied by producers, resulting in a stable price?
Equilibrium
What is the Multiplier/Ripple Effect in economics?
When an initial economic event triggers a chain reaction of direct and indirect impacts across the entire economy.
What is a monopoly?
When there is only one seller of a good or service
What is symmetric information?
when both sides of a transaction have equal relevant information.
What are externalities?
The costs or benefits of a transaction that affect a third party.
What are price controls?
limits on either the maximum or the minimum price of a good/service (usually put in place by the government)
What term refers to when the costs and benefits to society are optimized and all potential gains from trade are realized?
Efficiency
How does decentralized planning differ from central planning?
Decentralized planning allows all people to make their own individual economic decisions rather than the government.
What is market failure?
When the price mechanism fails to allocate resources efficiently, resulting in a sub-optimal distribution of goods and services.
What is asymmetric information?
Any time one side of a transaction has relevant information about the transaction that the other side does not have
Why can externalities result in market failure?
Buyers and sellers do not see all of the costs or all of the benefits of a transaction for society at large.
What term refers to when small, organized groups (lobbies) receive significant advantages from a policy, but costs are spread across a large population?
Concentrated Benefits and Dispersed Costs
What is Dead Weight Loss (DWL)?
A reduction in overall economic surplus or in gains from economic exchange.
According to F.A. Hayek, what is the main economic problem?
How to best allocate resources when economic knowledge is subjective and limited (since no one person knows everything about the economy)
What's the main way monopolies contribute to market failure, according to Thomas Sowell?
Transactions that should take place don’t (Dead Weight Loss) because the price is artificially high.
Why do transactions ususally take place when there is symmetric information?
Buyers know the value of what they're paying for and sellers always get their costs covered.
How does the government usually tend to address external costs and external benefits?
For external costs, they use taxes to reduce transactions.
For external benefits, they use subsidies to incentivize more transactions.
What is the main issue caused by a price ceiling and a price floor respectively?
A price ceiling results in a market shortage (When Quantity Demanded > Quantity Supplied).
A price floor results in a market surplus (When Quantity Supplied > Quantity Demanded).
What is the double shift rule?
When two curves shift at the same time, either the price or the quantity will be indeterminate.
How do prices help solve the main economic problem?
Prices communicate the changes in the scarcity and value of goods without individuals having to know about the many causes of these changes.
What are at least two of the four main barriers to entry in a market that can lead to the creation of a monopoly?
Government Restrictions
Natural Monopolies
Inputs that are hard to duplicate
Innovation
Why does asymmetric information result in market failure (think of the activity we did in class)?
Resources are transferred from higher quality items to lower quality items, since buyers won’t be willing to risk much of their hard-earned money if they can't trust info from the sellers.
Why did the Mexico City air pollution law end up increasing pollution and failing to reduce the number of cars on the road?
People bought cheap second cars that were older and polluted more to drive on the days their main cars were prohibited from driving.
What was the main lesson of "the Candlemaker's Petition" by Frederic Bastiat?
By trying to “protect” domestic producers, we often inconvenience and even harm the lives of everyone else in the country - the consumers.