AR78 173 W  Opportunity Cost and Tradeoffs

Understanding the economic way of thinking reveals the importance of two fundamental concepts: opportunity cost and tradeoffs. Opportunity cost is the value of the next best alternative that is forgone when making a decision. For example, Jenny decides to go on a third date with ...

AR78 195 W  Demand Curves in Economics

Supply and demand are foundational concepts in economics, often illustrated by a graph with the demand curve showing how much of a good people will want at different prices. The demand curve typically slopes downward, indicating that as the price decreases, the quantity demanded ...

AR78 217 W  Supply Curve in Economics

The supply curve in economics illustrates how much of a product suppliers are willing to offer at different prices. Similar to the demand curve, the supply curve applies to every good and service. Typically, as the price of a product increases, the quantity supplied also rises. F...

AR78 175 W  How Buyers and Sellers Determine Prices

In economics, the equilibrium price is where the quantity demanded equals the quantity supplied. This price is stable because any deviation from it leads to forces that push the price back towards equilibrium. For instance, if the price of oil is above equilibrium, there will be ...

AR78 280 W  What is GDP?

Gross Domestic Product (GDP) is the total market value of all finished goods and services produced within a country in a year. Imagine the economy as a huge supermarket filled with various products like clothing, washing machines, and services like dog walking and massages. Each ...

AR78 224 W  The Role of Real GDP and Living Standards

Is the economy growing, and are people better off today than in the past? GDP (Gross Domestic Product) helps answer these questions, but it requires adjustments for accuracy. GDP can increase in two ways: through higher prices (inflation) or by producing more or better goods and ...

AR78 177 W  Understanding Real Interest Rates

The nominal interest rate is the rate you typically see on bank or credit card statements and is what most people refer to when they mention "interest rate." However, the real interest rate takes inflation into account, providing a more accurate measure of the lender's return. ...

AR78 190 W  The Lifecycle Theory of Savings

The lifecycle theory of savings explains how people choose to spend and save money throughout their lives. This theory considers the typical income pattern that most individuals experience, where income rises and falls at different life stages. In the early years, while still ...

AR78 201 W  Natural Rate of Unemployment

The natural rate of unemployment is the unemployment level that would exist in an economy without cyclical unemployment, which is unemployment linked to the business cycle. This natural rate includes both frictional and structural unemployment. Unfortunately, it¡¯s difficult to m...

AR78 208 W  Efficient-Market Hypothesis

The Efficient-Market Hypothesis (EMH) suggests that the prices of assets, like stocks, already include all publicly available information. This means that if you're making investment decisions based on public information, you won't consistently outperform the market. The basic...

AR78 233 W  Understanding Real Shocks

Real shocks are unexpected events that can significantly impact an economy by affecting the fundamental factors of production. Examples include droughts, changes in the oil supply, hurricanes, wars, and technological advancements. These shocks can be either positive or negative a...

AR78 251 W  Understanding Financial Intermediaries

Financial intermediaries are institutions that facilitate the movement of funds between savers and borrowers, making it easier and more efficient for money to flow where it's needed. The most common examples include banks, bond markets, and stock markets. Why are financial int...

AR78 171 W  Leverage Ratios and Their Risks

A leverage ratio measures the amount of debt a person or company uses compared to their equity, essentially showing how much risk is involved. The concept is illustrated using a housing example. If you buy a $100,000 home with a 5% down payment, you have $5,000 in equity, leaving...

AR78 160 W  Stagflation: Causes and Challenges

Stagflation is an economic condition where high inflation occurs alongside high unemployment and stagnant demand for products. This situation is unusual because inflation is typically associated with low unemployment, but in stagflation, both inflation and unemployment are high. ...

AR78 199 W  Understanding Crowding Out in Economic Poli...

Crowding out refers to a situation where government spending, especially during full employment, reduces or "crowds out" private spending and investment. When an economy is at full employment, resources like workers and capital are already fully utilized. If the government increa...

AR78 172 W  Free Rider Problem and Its Impact on Public...

The free rider problem occurs when someone benefits from a good or service without paying for it, leading to potential issues in funding those goods or services. A common example is a group assignment in class, where one student does no work but still receives the same grade as e...

AR78 186 W  Fisher Effect: Inflation and Interest Rates...

The Fisher effect describes the relationship between the inflation rate and the nominal interest rate. It highlights that when inflation is expected to rise, nominal interest rates also increase to maintain the lender's real return on a loan. For example, if your grandma lends...

AR78 223 W  Opportunity Cost: Making Better Economic De...

Opportunity cost refers to the value of the next best alternative that you give up when you choose one option over another. For example, if you decide to wait in line for free ice cream, you're giving up the opportunity to use that time for something else, like working or reading...

AR78 210 W  Understanding Omitted Variable Bias

Omitted variable bias is a type of selection bias that occurs in regression analysis when important variables are left out, leading to misleading results. This bias happens when a key factor that influences the relationship between two variables is not included in the analysis. ...

AR78 164 W  Managing Common Resources

A common resource is a type of good or service that is nonexcludable and rival. "Nonexcludable" means that it is difficult or impossible to prevent people from using the resource, while "rival" means that one person's use of the resource reduces the amount available for others. A...

AR78 164 W  The Impact of Geography on Economic Growth

Geography plays a crucial role in economic growth, as many of the world's most prosperous cities are located near major bodies of water, such as coasts or rivers. These locations allow for cheaper and easier transportation of goods, facilitating trade and access to larger markets...

AR78 165 W  How the Stock Market Works

The stock market began in the 1600s when the Dutch East India Company sold shares to private citizens. This helped fund its expensive voyages and created the first stock market. Today, companies use the stock market to raise money by selling shares to investors. When a company jo...

AR78 177 W  Why Competing Businesses Cluster Together

Why do similar businesses, like gas stations or coffee shops, often cluster together instead of spreading out? This phenomenon can be explained by Hotelling's Model of Spatial Competition, which illustrates how businesses position themselves in response to competitors. Imagine...