Walrasia blog · economics, explained

Crowding out on the loanable funds graphWhat crowding out is and how to draw it: the government's $50M deficit shifts the demand for loanable funds right, the real rate rises from 5% to 6%, and private firms borrow $25M less. Plus the 2020 case, when a record deficit did not raise rates.

How buying bonds lowers the interest rateWhy the central bank buys bonds to cut interest rates: the money market, the $50M purchase that moves the rate from 5% to 4%, bond prices and rates in opposite directions, and the toolkit today.

How banks create money: the money multiplierHow a $1,000 deposit can become $10,000: one bank's loan is the next bank's deposit, the formula 1 ÷ reserve ratio, new money against total deposits, and why real banks create less.

The spending multiplier, explained with numbersWhy $100 million of government spending can add $500 million to GDP: the rounds, the formula 1 ÷ (1 − MPC), why a tax cut does less, and why real multipliers are smaller.

What a recession looks like on the AD-AS graphA recession is not a point sliding down a curve: AD shifts left, real GDP falls below potential and jobs go. The graph, Coralia's numbers, and the way out.

Who counts as unemployed (and who does not)A student, a retiree, a part-time baker and a man who gave up looking all have no full-time job. Only one of them is unemployed. The three boxes, the formula, and the graphs to move.

Real vs nominal: what inflation does to your payGrandpa earned $3,000 in 1976, Amara earns $36,000 today: 12 times the dollars, only 20% more goods. How to compare pay across years, with graphs to move.

Why GDP counts only final goodsA farm sells wheat for $100, the mill sells flour for $250, the bakery sells bread for $600. GDP goes up by $600, not $950. Here is why, with two graphs you can move.

Negative externality graph explainedThree lines, not two: demand, the firm's own cost and the social cost above it. Where the market stops, where it should stop, and why the triangle between them is the loss.

What a minimum wage does on the labor market graphDraw the wage floor above the equilibrium and read the gap: how many jobs go, how many job seekers appear, and why one employer in town changes the answer.

The prisoner's dilemma in economics, explainedWhy do two gas stations end up in a price war that costs them both? The prisoner's dilemma, read on a payoff matrix with real numbers.

Why marginal revenue is below demand for a monopolyWhy is one more sale worth less than its price to a monopolist? A cable car sells 750 rides at $25, not $26: MR falls twice as fast as demand.

Why firms earn zero economic profit in the long runA strawberry farm earns $320 a day at $14 a crate. New farms arrive, the price slides to $10.25 and the profit is gone. Why entry stops exactly at the bottom of average total cost, with two graphs you can move, and why zero profit is not zero income.

Why marginal cost crosses average total cost at its minimumA bakery with one oven: the 4th baker's loaves cost $6.00 each, exactly the average, and the average stops falling. The marginal-average rule with a test-score graph, a cost graph you can move, and the test trap.

What is deadweight loss? The tax exampleA $14 tax on concert tickets raises $12,600 for the city. Buyers and sellers lose $13,300. The missing $700 is the deadweight loss: 100 tickets that no longer sell. Two interactive graphs, why the loss grows with the square of the tax, and the test trap.

Why does a price ceiling cause a shortage?Cap rent at $800 when the market rent is $1,200 and two things happen at once: more people want a home, and landlords offer fewer. The gap is the shortage. Two interactive graphs, who gains, who loses, and the test trap.

Price elasticity of demand, explained simplyElasticity is one number: the % change in sales divided by the % change in price. Above 1 buyers react a lot, below 1 they hardly move. Two cafés, two interactive graphs and the revenue rule.

Comparative advantage vs. absolute advantageAbsolute advantage means making more. Comparative advantage means giving up less. Trade follows the second one, even when one person is better at everything. Two graphs and a quick check.

Opportunity cost: what it is, with examplesOpportunity cost is the best thing you give up when you choose. Simple examples, one graph and a quick check, with the numbers of a fishing village.

Change in demand vs. change in quantity demandedThe price goes up and people buy less. Did demand fall? No: quantity demanded fell. Here is the difference, with two graphs and a quick check.

Economics, explained