TASC Economics Level 3 cheat sheet

Scarcity: unlimited wants exceed limited resources; forces choice among alternatives.

Opportunity cost: value of the next-best alternative forgone when a choice is made.

Production possibilities frontier (PPF): shows maximum combinations of two goods producible with given resources and technology.

Points on PPF: efficient; inside PPF: inefficient (unemployment or underemployment); outside PPF: unattainable.

PPF slope (in absolute value) equals the opportunity cost of the good on the horizontal axis.

Law of increasing opportunity cost: as production of a good increases, its opportunity cost rises because resources are not perfectly adaptable.

Marginal decision rule: take an action if marginal benefit exceeds marginal cost; stop where MB = MC.

Sunk costs are past and unrecoverable; they should not affect current marginal decisions.

Market economy: resources allocated through prices and private decisions; command economy: central authority sets output and prices; mixed economy combines both.

Government functions: provide public goods, correct externalities, promote competition, redistribute income, stabilize the macroeconomy.

Public good properties: nonrival in consumption and nonexcludable; free-rider problem leads to underprovision by private markets.

Negative externality (e.g., pollution) creates marginal social cost > marginal private cost; market output exceeds socially optimal output.

Positive externality (e.g., education) creates marginal social benefit > marginal private benefit; market output falls short of socially optimal output.

Pigouvian tax equals marginal external cost; Pigouvian subsidy equals marginal external benefit.

Coase theorem: with well-defined property rights and low transaction costs, bargaining can internalize externalities regardless of initial rights assignment.

Progressive tax: average tax rate rises with income; regressive: falls; proportional: constant.

Law of demand: price and quantity demanded inversely related, ceteris paribus; demand curve slopes downward.

Demand shifters: income, prices of related goods (substitutes, complements), tastes, expectations, number of buyers.

Law of supply: price and quantity supplied directly related; supply curve slopes upward.

Supply shifters: input prices, technology, expectations, number of sellers, taxes and subsidies.

Equilibrium: quantity demanded equals quantity supplied; price where demand and supply curves intersect.

Surplus (excess supply) occurs above equilibrium price and pushes price down; shortage (excess demand) occurs below equilibrium and pushes price up.

A price ceiling set below equilibrium creates a shortage; a price floor set above equilibrium creates a surplus.

Movement along a curve is caused by a change in the good's own price; a shift is caused by a change in a non-price determinant.

Price elasticity of demand (PED) = |% change in quantity demanded / % change in price|; midpoint formula: (ΔQ / average Q) / (ΔP / average P).

PED > 1: elastic; PED < 1: inelastic; PED = 1: unit elastic.

Total revenue test: if price and total revenue move in opposite directions, demand is elastic; same direction, inelastic.

Determinants of PED: availability of substitutes, share of budget, time horizon, necessity versus luxury.

Income elasticity of demand = %ΔQ / %Δincome; positive for normal goods, negative for inferior goods.

Cross-price elasticity = %ΔQ of good A / %ΔP of good B; positive for substitutes, negative for complements.

Price elasticity of supply = %ΔQ supplied / %ΔP; typically more elastic in the long run.

Tax incidence: burden falls more heavily on the side of the market that is less elastic.

Law of diminishing marginal returns: as a variable input increases with fixed inputs, marginal product eventually falls.

Total cost (TC) = total fixed cost (TFC) + total variable cost (TVC); average total cost (ATC) = TC / Q.

Marginal cost (MC) = ΔTC / ΔQ; MC intersects ATC and AVC at their minimum points.

Profit-maximizing rule for all market structures: produce where MR = MC (and price ≥ AVC in short run).

Perfect competition: many firms, identical products, free entry/exit; firm is a price taker, P = MR.

Monopoly: single seller, barriers to entry, downward-sloping demand; MR < P; long-run positive economic profit possible.

Monopolistic competition: many firms, differentiated products, free entry; zero long-run economic profit.

Oligopoly: few firms, interdependence, strategic behavior; kinked demand curve and game theory apply.

Derived demand: demand for labor depends on demand for the output it produces.

Marginal revenue product (MRP) = marginal product of labor × marginal revenue; firm hires until MRP = wage.

Labor supply curve slopes upward; individual labor supply may bend backward at high wages.

Equilibrium wage: quantity of labor demanded equals quantity supplied.

Minimum wage set above equilibrium creates a labor surplus (unemployment).

Unions raise wages through collective bargaining, increasing demand for union labor, or restricting supply.

Compensating wage differentials: risky or undesirable jobs pay more than otherwise comparable jobs.

Human capital: education, training, and experience raise productivity and earnings; investment in human capital explains much wage variation.

GDP: market value of all final goods and services produced within a country in a given period.

Expenditure approach: GDP = C + I + G + (X − M).

Nominal GDP uses current prices; real GDP uses base-year prices; GDP deflator = (nominal GDP / real GDP) × 100.

Real GDP per capita = real GDP / population; a rough measure of living standards.

Unemployment rate = (unemployed / labor force) × 100; labor force = employed + unemployed.

Unemployment types: frictional, structural, cyclical; natural rate = frictional + structural.

Inflation rate = [(CPI this year − CPI last year) / CPI last year] × 100.

Business cycle phases: expansion, peak, contraction (recession), trough.

Functions of money: medium of exchange, unit of account, store of value.

M1 includes currency in circulation and checkable deposits; M2 adds savings deposits, small time deposits, and money market funds.

Money multiplier = 1 / required reserve ratio.

Federal Reserve tools: open market operations, discount rate, reserve requirements, interest on reserves.

Expansionary monetary policy: buy securities, lower discount rate, lower reserve requirement; increases money supply and lowers interest rates.

Contractionary monetary policy: sell securities, raise discount rate, raise reserve requirement; decreases money supply and raises interest rates.

Quantity theory of money: MV = PY; long-run inflation is linked to money growth.

Federal funds rate: interest rate banks charge each other for overnight loans of reserves; primary target of Fed open market operations.

Fiscal policy: government use of spending and taxation to influence the economy.

Expansionary fiscal policy: increase government spending or cut taxes; shifts aggregate demand right.

Contractionary fiscal policy: decrease government spending or raise taxes; shifts aggregate demand left.

Automatic stabilizers: unemployment insurance and progressive income taxes dampen fluctuations without new legislation.

Budget deficit = government spending − tax revenue in one year; debt is accumulated deficits.

Crowding out: government borrowing raises interest rates and reduces private investment.

Multiplier effect: change in GDP = multiplier × change in spending; multiplier = 1 / (1 − MPC).

Tax incidence and efficiency: taxes change incentives; deadweight loss rises with elasticity of supply and demand.

Comparative advantage: a country should specialize in goods for which it has the lowest opportunity cost.

Absolute advantage: ability to produce more output with the same resources; distinct from comparative advantage.

Trade increases total world output and consumption possibilities beyond the domestic PPF.

Tariff: tax on imports; quota: limit on quantity imported; both raise domestic price and reduce imports.

Exchange rate: price of one currency in terms of another.

Currency appreciation makes exports more expensive and imports cheaper; depreciation does the opposite.

Balance of payments: current account (goods, services, income, transfers) + financial account + capital account = 0.

Globalization: increased integration of national economies through trade, investment, and information flows.