As the price of a good increases, the quantity supplied increases, ceteris paribus. Producers are willing to supply more at higher prices because higher prices increase the potential for profit.
When everyone saves more, total savings may decrease. Individual prudence becomes collective harm: reduced spending leads to reduced income, which leads to reduced ability to save.
"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."
-- Adam Smith, 1776A country benefits from trade even if it can produce every good more efficiently than its trading partner. What matters is relative efficiency -- opportunity cost -- not absolute productivity. Ricardo's proof remains one of the most counterintuitive and powerful results in economics.
Water is essential to life yet nearly free. Diamonds are frivolous yet enormously expensive. The resolution: price reflects marginal utility, not total utility.
"The long run is a misleading guide to current affairs. In the long run we are all dead."
-- John Maynard Keynes, 1923The responsiveness of quantity demanded to a change in price. Necessities are inelastic (demand barely changes); luxuries are elastic (demand swings widely). Tax incidence falls on the less elastic side of the market.
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
-- F.A. Hayek, 1988Technological improvements that increase the efficiency of resource use tend to increase total consumption of that resource, not decrease it. More efficient engines lead to more driving, not less fuel consumed. Efficiency is not conservation.
Adding more of one input while holding others constant will eventually yield smaller and smaller increases in output. The tenth worker in a factory adds less than the second.
The fundamental condition that human wants exceed available resources, forcing every society to make choices about allocation.
The value of the next best alternative forgone when a choice is made. Every decision has a shadow price.
A state where no participant has an incentive to change behavior. The price at which quantity demanded equals quantity supplied.
A cost or benefit that affects a party not directly involved in a transaction. Pollution is the textbook negative externality.
The ability to produce a good at a lower opportunity cost than another producer. The basis for mutually beneficial trade.
The tendency to take greater risks when insulated from consequences. Insurance, bailouts, and guarantees all create moral hazard.
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