Theories and Basics

What is a market failure? A market failure is when the free market fails to allocate resources in the most efficient way. What that means is resources are being used to produce goods that could instead be used to produce something that…

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Quick Definition: Laissez-faire is an economic system in which there is a competitive market economy where prices are determined by supply and demand and there is little or no intervention from the government. Also known as: Laissez-faire economics; free market economics; What…

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Quick Definition: Supply-side economics is a subfield of economics that argues the supply in the economy is what determines long run economic growth. What is supply-side economics? Supply-side economics is the name of the branch of economics that argues economic growth (often…

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Quick Definition: Asymmetric information is when the buyer or the seller knows more than the other about the quality of the product. Asymmetric information is one cause of market failures. What is asymmetric information? Asymmetric information is one of the main causes…

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What is cost-benefit analysis (CBA)? CBA is a method of calculating the potential costs and benefits of a project or action which includes both the private costs and benefits and the external costs and benefits. CBA is mainly used by governments when…

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Quick Definition: Barriers to entry are obstacles which make it difficult for new firms to enter a market. What are barriers to entry? Barriers to entry are the factors that make it difficult for firms to enter and compete in a market.…

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How does the model explain the economy? Keynesian economists believe that the economy does not move towards full employment automatically, as the Classical economists suggest. This will result in the following two scenarios: If the equilibrium level in the economy (Y) is…

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What is the Keynesian Model? Aggregate demand (AD) refers to the total level of demand in the economy at given prices and has the following formula: Consumption (C) + Government Spending (G) + Investment (I) + (Exports (X) – Imports (M)). In…

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