79

Some areas of economics have more consensus and predictive power than others. Most economists would agree on the effects of trade barriers, could fairly accurately forecast the effects of a price change given a good demand estimate, would come to the same conclusion about the effects of allowing a merger between two large competing firms, know how asset ...


50

Instead of proposing specific equations, I will point to two concepts that lead to specific equations for specific theoretical set ups: A) Equilibrium The most fundamental and the most misunderstood concept in Economics. People look around and see constant movement -how more irrelevant can a concept be, than "equilibrium"? So the job here is to convey that ...


48

Trade creates value. Previously, Kate preferred spending \$50 on food at Alice's restaurant (rather than cook her own food). And Alice preferred spending \$50 getting her hair cut at Kate's (rather than cut her own hair). That Kate must now cook her own food and Alice cut her own hair means that value has fallen (where value is broadly defined as the degree ...


38

Here's an explanation from Paul Krugman. You can read more about this in Krugman's book End This Depression Now!. Since joining the Euro, Spain has experience large capital inflows—money flowing into Spain, mostly from Northern Europe. These inflows caused a boom in investment, coupled with an increase in prices of virtually everything (including labor) ...


38

But when people pathologically hoard so much cash that they impoverish the entire nation This sentence seems to imply that we should fault the rich not because they are rich, but because they do not spend their riches. Ok, let's scrutinize this assertion, and not go into philosophical and sociopolitical arguments about inequality, justice, etc, which ...


33

As has already been said, the MOST fundamental equation is surely: $$\text{MB}=\text{MC}$$ EDIT: This equation is fundamental in terms of the way economists think. As pointed out in the comments below, in terms of fundamental equations of economic models, the most fundamental equations describe equivalences between the uses and supplies of items (money, ...


29

My favorite example is the initial formulation of Arrow's impossibility theorem in the first edition of Arrows' "Social Choice and Individual Values" (1951). In the first edition, Arrow claimed that, together with 4 other conditions, the following domain condition ``The domain $\mathcal{D}$ is sufficiently extensive so that there exists at least one free ...


28

Opinion of Economists What makes you think that economists are so aligned against the minimum wage? Take a look at the IGM Forum that polls top academic economists. There is substantial disagreement about the effects and welfare implications of a minimum wage hike. IGM Forum: Minimum Wage NYTimes Blog Post about it Theory about the minimum wage Also, it'...


25

The optimal level of inflation is very debated with unclear answers. There are many reasons, and a great answer would be very long. It should also distinguish between expected inflation and surprises. I'm not going to do any of this, but giving you three reasons for a desirable positive level of inflation. This list is of course incomplete, also there are ...


22

Most of intro econ is intersecting lines. Specifically, $$MB = MC$$ * Equilibrium is achieved when Marginal Benefit is equal to Marginal Cost* $$\dfrac{MU_x}{p_x}=\dfrac{MU_y}{p_y}.$$ Marginal Utility per unit cost should always be equal Economics is about the logic of human behavior, how we make decisions in a world of scarcity. These equations describe ...


22

Kydland and Prescott's seminal paper on RBC theory uses a log-log specification on consumption-leisure preferences, arguing it is the only one that matches long-run constant share of working hours (one of the Kaldor facts). This is false. In fact, there's a whole class of additively-separable utility functions (King-Rebelo-Plosser, which were discovered (...


21

In addition to Ubiquitous' excellent answer, I will also point out the general lack of experimental controls in economics. Your example about crash-testing a car is an easily designed, perfectly reproducible experiment. We can start with laws of motion and knowledge of forces and material strengths to design a car we think will work well, and then actually ...


19

I think one of the most important equations (at least within macroeconomics) is: $$E\left[ m R \right] = 1$$ This equation has been used to derive many foundational results. This equation motivated the Hansen–Jagannathan bound. It is fundamental for asset pricing as well. Also, something interesting I saw from once from Tom Sargent. If you use the ...


19

An influential paper by Angrst and Krueger (1991) used quarter of birth as an instrument for effect of schooling on earnings. Since compulsory schooling stops when you reach a certain age (so many dropout when they can). However, it turned out that quarter of birth is not a good instrument, correlated with family background and thus also earnings. Buckles ...


18

I once heard Roger Myerson talk about why he thought Economics has, as a Social Science, been so successful in applying (or has so readily incorporated) mathematics. He suggested that perhaps it was due to some of the fundamental linearities within the world. Two examples would be the flow-balance constraints of scarce goods (commodity constraints) and no-...


18

From a purely theoretical perspective, one argument for a minimum wage would be that the majority of employees work for medium-large sized businesses and face significant personal cost from switching employer. The upshot, argue some, is that firms have disproportionate bargaining power when negotiating terms of employment. To get an idea of how this would ...


18

Considered a good thing by whom? Financial institutions and speculators: yes, since houses for them are just another asset. Higher asset prices is a key mechanism of profit making for financial institutions (capital gains). In the recent financial crisis house prices collapsed and people defaulted on their mortgage payments. Thus, the fall in the value of ...


18

Both Alice and Kate have bills to pay, regardless of whether they are earning money or not. Restaurants and salons have to pay rent and maintenance on their properties whether they are in business or not. They both need to feed themselves and possibly their families whether they earn income or not. They need electricity and water and other utilities in ...


17

Although I agree with Jyotirmoy Bhattacharya that the most interesting ideas in economics are not always best expressed through equations, I still want to mention the Slutsky or compensated law of demand from consumer theory $$ (p' -p) \Big[ x\big(p', p' x(p,w)\big) – x\big(p,w\big)\Big]^T \leq 0,$$ where $p',p \in \mathbb{R}_{++}^n$ are any two price ...


17

The primary source of the recent ruble collapse has almost certainly been the falling international oil price, aggravated by some other features of Russian politics and its economy. Petroleum products account for over half of Russia's export revenue, and most remaining export revenue comes from other commodities, whose output it cannot easily adjust. When ...


17

I'd say that some benefits of Bitcoin and other cryptocurrencies (i.e. "altcoins"), include: Decentralization -- which is advantageous for those who are skeptical of monetary policy, runs on banks, etc. Anonymity, or at least the perception thereof -- with increasingly comprehensive monitoring of transactions (particularly non-cash transactions), those ...


16

The short answer is No. Every single year, except 2009, for the past 55 years of continuously recorded economic history, the world has been getting richer. The -2.1% global recession in 2009 was made up in 2010 with 4.1% growth. I was just working with the World Bank's World Development Indicators, which track global GDP growth, and I double checked. We ...


15

FooBar is quite right that unless you expect GDP growth to stop, fixed nominal supply currencies will lead to deflation. A moderate degree of currency inflation serves a number of useful functions in the economy. The most obvious are: It induces people to spend their money before it loses its value. In a deflationary environment there is an incentive to ...


15

The title "What is the purpose of increasing the minimum wage?" and the question "is there an economic reason as to why a higher minimum wage would benefit the economy?" while overlapping, are not necessarily identical. To answer the latter, minimum wage earners have the highest velocity money in the economy. By this, I mean that when I was working, the ...


15

In a 1929 paper, Harold Hotelling introduced what became the standard model of spatial competition. Two firms position themselves on an interval, which induces a certain demand structure, and then compete in prices. The model was influential and widely taught. The message was that firms diferentiate minimally, both locate in the center. But in 1979 (!) ...


14

Neither the answer posited above nor the comment are off the mark. Inability to use monetary policy to adjust to a shock is certainly a cause of high unemployment in the aftermath. Idiotic fiscal policy doesn't help either. The very last thing to try to do after such a shock is to eliminate government deficits in such situations. It becomes a vicious -- ...


14

This is freebee, but I'm gonna grab it: Reinhard and Rogoff (2010, AER pp) argued that there is critical level of government debt-to-gdp ratio at around 90%, arguing that countries that cross this level of leverage typically grow less. Ignoring the whole point of correlation versus causality, UMass student + coauthors [reference needed] showed that this ...


13

Capital is included in all the big estimated New Keynesian models (Smets-Wouters, Christiano-Eichenbaum-Evans), etc. But you're absolutely right that the stylized core NK model does not have capital - which is hard to defend on empirical grounds, since capital investment is a very important part of business cycle fluctuations and the response to monetary ...


13

The Euro was always conceived by most Economists as a political goal, not an economic one. Prologue: There is the theory of Optimum Currency Areas (OCA) which characterizes properties that a larger area would need to have if it were to operate on a single unit of currency. Since the announcement of the Euro around 1990, there were many papers that looked ...


13

You would expect the rate of growth to be generally positive because inventing things or inventing more efficient ways of doing things, is generally a one way process - things don't get un-invented. So we would expect things that are made by machines to be made ever more quickly as the machines evolve and improve. Periods of negative growth are likely to ...


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