Economics: Incentives, Markets, and Policy
Foundations
Scarcity forces choice, and every choice carries opportunity cost. The production possibilities curve illustrates tradeoffs and efficiency.
Markets
Demand slopes down; supply slopes up. A change in price moves along the curve; a change in income, tastes, input costs, or technology shifts the curve. Equilibrium clears the market. A price ceiling set below equilibrium creates a shortage; a floor set above creates a surplus. Elasticity measures responsiveness.
Macro measures
GDP = C + I + G + (X − M). It counts final goods and excludes intermediate goods and transfer payments. Nominal versus real distinguishes current dollars from inflation-adjusted dollars. Unexpected inflation hurts lenders and fixed-income savers and helps borrowers. Real interest ≈ nominal interest − inflation.
Policy
Fiscal policy is government taxing and spending. Monetary policy is the Federal Reserve's domain, exercised chiefly through open market operations, plus the discount rate and reserve requirements; the Fed has a dual mandate of price stability and maximum employment. Comparative advantage explains gains from trade; tariffs raise prices and reduce total surplus.
Traps
Confusing a shift in a curve with movement along it; attributing monetary tools to Congress; counting used-car sales fully in GDP; assuming zero unemployment is the goal (frictional and structural unemployment persist); mixing percentage points with percent.
Worked example
A city caps rent below equilibrium. Result: quantity demanded exceeds quantity supplied - a shortage - resolved by queues, waiting lists, or non-price rationing, not by price.
Rule of thumb
For policy questions, ask who gains, who loses, and over what horizon. Almost every answer is a distributional tradeoff, not a free lunch.