When the government redistributes income with taxes and welfare, the economy becomes more efficient.

When economists say, "There is no such thing as a free lunch," they mean that all economic decisions involve trade-offs.

Adam Smith's “invisible hand” concept describes how corporate business reaches into the pockets of consumers like an “invisible hand.”

Rational people act only when the marginal benefit of the action exceeds the marginal cost.

The European Union will benefit economically if we eliminate trade with Asian countries because its citizens will be forced to produce more of their own cars and clothes.

When a jet flies overhead, the noise it generates is an externality.

A tax on alcoholic drinks raises the price of alcoholic drinks and provides an incentive for consumers to drink more.

An unintended consequence of public support for higher education is that low tuition provides an incentive for many people to attend state universities even if they have no desire to learn anything.

Sue is better at cleaning and Bob is better at cooking. It will take fewer hours to eat and clean if Bob specializes in cooking and Sue specializes in cleaning than if they share the household duties evenly.

High and persistent inflation is caused by excessive growth in the quantity of money in the economy.

Economic models must mirror reality or they are of no value.

Assumptions make the world easier to understand because they simplify reality and focus our attention.

It is reasonable to assume that the world is composed of only one person when modelling international trade.

When people act as scientists, they must try to be objective.

If an economy is operating on its production possibilities frontier, it must be using its resources efficiently.

If an economy is operating on its production possibilities frontier, it must produce less of one good if it produces more of another.

Points outside the production possibilities frontier are attainable but inefficient.

If an economy were experiencing substantial unemployment, the economy is producing inside the production possibilities frontier.

The production possibilities frontier is bowed outward because the trade-offs between the production of any two goods are constant.

An advance in production technology would cause the production possibilities curve to shift outward.

If Japan has an absolute advantage in the production of an item, it must also have a comparative advantage in the production of that item.

Comparative advantage, not absolute advantage, determines the decision to specialize in production.

Absolute advantage is a comparison based on productivity.

Self-sufficiency is the best way to increase one's material welfare.

Comparative advantage is a comparison based on opportunity cost.

If a producer is self-sufficient, the production possibilities frontier is also the consumption possibilities frontier.

If a country's workers can produce 5 hamburgers per hour or 10 bags of French fries per hour, absent trade, the price of 1 bag of fries is 2 hamburgers.

If producers have different opportunity costs of production, trade will allow them to consume outside their production possibilities frontiers.

If trade benefits one country, its trading partner must be worse off due to trade.

Talented people that are the best at everything have a comparative advantage in the production of everything.

A perfectly competitive market consists of products that are all slightly different from one another.

An oligopolistic market has only a few sellers.

The law of demand states that an increase in the price of a good decreases the demand for that good.

If apples and oranges are substitutes, an increase in the price of apples will decrease the demand for oranges.

If golf clubs and golf balls are complements, an increase in the price of golf clubs will decrease the demand for golf balls.

If consumers expect the price of shoes to rise, there will be an increase in the demand for shoes today.

The law of supply states that an increase in the price of a good increases the quantity supplied of that good.

An increase in the price of steel will shift the supply of cars to the right.

When the price of a good is below the equilibrium price, it causes a surplus.

The market supply curve is the horizontal summation of the individual supply curves.

If the quantity demanded of a good is sensitive to a change in the price of that
good, demand is said to be price inelastic.

Using the midpoint method to calculate elasticity, if an increase in the price of pencils from €0.10 to €0.20 reduces the quantity demanded from 1000 pencils to 500 pencils, then the demand for pencils is unit price elastic.

The demand for tyres should be more inelastic than the demand for Michelin brand tyres.

The demand for aspirin over one month should be more elastic than the demand for aspirin over one year.

The price elasticity of demand is defined as the percentage change in the price of that good divided by the percentage change in quantity demanded of that good.

If the cross-price elasticity of demand between two goods is positive, the goods are likely to be complements.

If the demand for a good is price inelastic, an increase in its price will increase total revenue in that market.

The demand for a necessity such as petrol tends to be elastic.

If a demand curve is linear, the price elasticity of demand is constant along it.

If the income elasticity of demand for a bus ride is negative, then a bus ride is an inferior good.

If the equilibrium price of petrol is €1.00 per litre and the government places a price ceiling on petrol of €1.50 per litre, the result will be a shortage of petrol.

A price ceiling set below the equilibrium price causes a surplus.

A price floor set above the equilibrium price is a binding constraint.

The shortage of housing caused by a binding rent control is likely to be more severe in the long run when compared to the short run.

The minimum wage helps all teenagers because they receive higher wages than they would otherwise.

A 10 per cent increase in the minimum wage is more likely to raise unemployment among teenage workers than among mid-career professional workers

A price ceiling that is not a binding constraint today could cause a shortage in the future if demand were to increase and raise the equilibrium price above the fixed price ceiling.

A price floor in a market always creates a surplus in that market.

A €10 tax on football boots will always raise the price that the buyers pay for football boots by €10.

The ultimate burden of a tax falls most heavily on the side of the market that is less elastic.

Total revenue equals the quantity of output the firm produces times the price at which it sells its output.

Wages and salaries paid to workers are an example of implicit costs of production.

If total revenue is €100, explicit costs are €50, and implicit costs are €30, then accounting profit equals €50.

If there are implicit costs of production, accounting profits will exceed economic profits.

When a production function gets flatter, the marginal product is increasing.

If a firm continues to employ more workers within the same size factory, it will eventually experience diminishing marginal product

If the production function for a firm exhibits diminishing marginal product, the corresponding total cost curve for the firm will become flatter as the quantity of output expands.

Fixed costs plus variable costs equal total costs.

Average total costs are total costs divided by marginal costs.

When marginal costs are below average total costs, average total costs must be falling.

An oligopoly is a market structure in which many firms sell products that are similar but not identical.

The market for crude oil is an example of an oligopolistic market.

The unique feature of an oligopoly market is that the actions of one seller have a significant impact on the profits of all of the other sellers in the market.

When firms cooperate with one another, it is generally good for society as a whole.

When firms cooperate with one another, it is generally good for the cooperating firms.

When oligopolists collude and form a cartel, the outcome in the market is similar to that generated by a perfectly competitive market.

The price and quantity generated by a Nash equilibrium is closer to the competitive solution than the price and quantity generated by a cartel.

The greater the number of firms in the oligopoly, the more the outcome of the market looks like that generated by a monopoly.

Cooperation is easily maintained in an oligopoly because cooperation maximizes each individual firm's profits.

The prisoners' dilemma demonstrates why it is difficult to maintain cooperation even when cooperation is mutually beneficial.

The factors of production are labour, land, and money.

The demand for a factor is considered to be a derived demand because it is derived from the firm's decision to supply output in another market.

For a competitive profit-maximizing firm, the demand curve for a factor is the value of the marginal product curve for that factor.

A factor exhibits diminishing marginal productivity if employing additional units of the factor reduces output.

If there is an increase in the equilibrium wage, there must have been an increase in the value of the marginal product of labour.

An increase in the demand for textbooks will increase the value of the marginal product of textbook writers.

A decrease in the supply of labour reduces the value of the marginal product of labour, decreases the wage, and decreases employment.

The only way for the value of the marginal product of a factor to rise is for the price of the output produced by the factor to rise.

An increase in the demand for pencils will likely improve the fortunes of both the pencil factory and the workers in the pencil factory.

The demand for labour is downward sloping because the production function exhibits diminishing marginal productivity of labour.

For an economy as a whole, income equals expenditure because the income of the seller must be equal to the expenditure of the buyer.

The production of an apple contributes more to GDP than the production of a gold
ring because food is necessary for life itself.

If a timber yard sells €1,000 of timber to a carpenter and the carpenter uses the timber to build a garage which he sells for €5,000, the contribution to GDP is €6,000.

A country with a larger GDP per person generally has a greater standard of living or quality of life than a country with a smaller GDP per person.

If nominal GDP in 2005 exceeds nominal GDP in 2004, real output must have risen.

If UK GDP exceeds UK GNP, then foreigners produce more in the UK than UK citizens produce in the rest of the world.

Wages are an example of a transfer payment because there is a transfer of payment from the firm to the worker.

In the UK, investment is the largest component of GDP.

Nominal GDP employs current prices to value output while real GDP employs constant base-year prices to value output.

A new car produced in 2004, but first sold in 2005, should be counted in 2005 GDP because that is when it was first sold as a final good.

An increase in the price of imported cameras is captured by the CPI but not by the GDP deflator.

An increase in the price of helicopters purchased by the UK armed forces is captured by the CPI.

Because an increase in petrol prices causes consumers to ride their bikes more and drive their cars less, the CPI tends to underestimate the cost of living.

An increase in the price of diamonds will have a greater impact on the CPI than an equal percentage increase in the price of food because diamonds are so much more expensive.

The "base year" in a price index is the benchmark year against which other years are compared.

If the CPI rises at 5 percent per year, then every individual in the country needs exactly a 5 percent increase in their income for their standard of living to remain constant.

The producer price index (PPI) is constructed to measure the change in price of total production.

If the Office of National Statistics fails to recognize that recently produced cars can be driven for many more miles than older models, then the CPI tends to overestimate the cost of living.

If your wage rises from €500 per week to €625 per week while the CPI rises from 112 to 121, you should feel an increase in your standard of living.

The largest category of goods and services in the CPI is food and non-alcoholic beverages.