Short Answer Topics Theory of the Invisible Hand Self interested behavior and competitive markets create a socially optimal economy where markets are best equipped to provide for society s best interests Heilbroner s categories of human societies He suggests that humans organize against calamity 1 1 Custom and tradition go with what worked in the past ex if your parents were farmers youll be a farmer too 2 2 Command leaders make rules and set social beliefs force rules the 3 3 Self interest and markets people do things for themselves invisible day might makes right hand Regions of Production Possibilities graphs In a PPF inside the curve is inefficient Outside the curve is unattainable On the curve is efficient Opportunity Cost including constant vs increasing When scarcity requires choices opportunity cost is the next best option Increasing opportunity cost low hanging fruit its easy at first to pick the low hanging fruit but it takes more effort to produce more Constant opportunity cost production costs the same no matter how much you produce Views of International Trade Mercantilist Smith Ricardo Mercantilist Adam Smith gold is wealth trade is a zero sum game and trade is war skills and resources are more important than gold trade can be mutually beneficial believes in absolute advantage focusing on where you enjoy the lowest cost and then trade comparative advantage focus where you have the lowest opportunity cost and then trade based off of Smith focus on opportunity cost believes in Ricardo Absolute advantage vs comparative advantage Absolute Advantage focus on where you enjoy the lowest cost then trade Comparative Advantage focus on where you have the lowest opportunity cost then trade Supply Demand determinants contrasting movement vs shift Determinants of Demand 1 Substitutes and Complements 2 Prices of other goods services 3 Tastes and preferences 4 Income wealth 5 Expectations of the future Determinants of Supply 1 Costs of production 2 Substitutes and complements 3 Technology 4 Expectations of the Future 5 Price Movement vs Shift Movement o Prices change change in quantity demanded ceteris paribus holds endogenous change Shift o Determinants change change in demand ceteris paribus does not hold exogenous change Market Failure categories remedies PEEM 1 Public Goods non exclusion consumption someone is a free rider Ex snowy road example buying food at a restaurant and splitting check netflix a Remedies collect taxes private membership 2 Equity markets are blind to fairness Ex minimum wage for workers in the United States a Remedies rationing price ceilings and floors 3 Externalities transactions effect third parties ex selling someone cigars factories producing harmful gasses a Remedies regulate marketable permits 4 Market Power ex overpriced goods like text books a Remedies government regulation Price Controls This refers to price ceilings vs price floors Problem Solving Themes Constructing and working with production possibilities graphs Calculating and working with opportunity cost data including abs comp adv Working with supply and demand data and graphs