55 votes
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Fundamental equations in economics

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 ...
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37 votes
Accepted

Why do celebrities get high wages?

If you ask yourself how much a potential employer would have to pay you to convince you to work for him, the answer is probably something like "at least as much as I could earn by doing the same job ...
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36 votes

Fundamental equations in economics

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 ...
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  • 2,006
36 votes

Seminal papers that later were proven to contain errors

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 ...
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33 votes
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Supermarket selling seasonal items below cost?

Is it simply for saving warehouse costs? Probably yes, holding onto inventory is very expensive. You have to pay for warehousing of the good, it takes the spot of some other inventory that might be ...
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  • 2,182
31 votes
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How can power/electricity prices be negative?

Yes, customers who were exposed to day-ahead wholesale market prices were paid to use electricity. It is a combination of several different factors that make the day-ahead wholesale electricity ...
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  • 8,012
30 votes
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If I gain, then someone else loses. Correct?

I completely agree with denesp's answer, however I think you can make it even simpler. On a very small scale, it's certainly true that if I gain, somebody else might lose. If I take away my ...
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30 votes
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Why is fuel more expensive on the high way in Europe?

Because there is no indication in your question that you are a student or practitioner of economics, I am writing an answer for a lay audience. Let me know if you would like more technical detail. A ...
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29 votes

Does a store suffering increased theft generally cause higher prices?

prices should have already been set to maximize the trade off between profit-per-sale and volume sold But profit-per-sale depends on costs, which depends on the theft numbers, so if theft increases, ...
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28 votes
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What are FOCs and SOCs?

Suppose you have a differentiable function $f(x)$, which you want to optimize by choosing $x$. If $f(x)$ is utility or profit, then you want to choose $x$ (i.e. consumption bundle or quantity produced)...
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28 votes

What's wrong with the "airline marginal cost pricing" argument?

One possible answer is that Mankiw's argument takes consumer demand for airline tickets as fixed and given. I would speculate that cheap last-minute tickets are a substitute good for regularly priced ...
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  • 605
27 votes

Seminal papers that later were proven to contain errors

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 (...
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  • 10.4k
26 votes

Seminal papers that later were proven to contain errors

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 ...
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24 votes

Fundamental equations in economics

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 ...
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  • 2,167
22 votes

Fundamental equations in economics

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 ...
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  • 9,155
22 votes

Seminal papers that later were proven to contain errors

An influential paper by Angrist 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 ...
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  • 987
20 votes

Fundamental equations in economics

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 ...
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  • 1,573
20 votes

Seminal papers that later were proven to contain errors

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 ...
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  • 10.4k
20 votes

What's wrong with the "airline marginal cost pricing" argument?

Do airlines actually do anything like the above? Yes, in fact now you will see on many airports specialized companies/windows that will offer last-minute flights very cheap. For example, in the past, ...
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  • 43.4k
19 votes

Fundamental equations in economics

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 ...
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19 votes

Partial vs. general equilibrium

Let's put the succinct answer by @TheAlmightyBob into an abstract model: We want to model the labor market. Markets' structure assumptions: goods market and labor markets are perfectly competitive. ...
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19 votes
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What is a substitute/complement in terms of mixed partial derivatives?

It is very important here to note that there are multiple, mutually inconsistent, possibilities for how to define a substitute/complement. One way is to say that $x$ and $y$ are complements if an ...
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19 votes

Does a store suffering increased theft generally cause higher prices?

What you're describing is retail shrink. It is taken into consideration when setting prices. A business will typically have consultants come in, measure their shrink to be X percent, and prices will ...
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  • 291
18 votes

If I gain, then someone else loses. Correct?

This is a fundamental question which economics can answer quite well. I'll rephrase your question a little bit- Is economics a zero sum game? The answer is no. Certainly some transactions are, but ...
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18 votes

Why do celebrities get high wages?

I suggest to learn more about the Economics of Superstars. Within the economics field, the "superstar" term is "...used to refer to extreme wage outliers (Adler, 1985; Rosen, 1981). These outliers are ...
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  • 332
17 votes
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Intuition behind Comparative Advantange

A classic example is to consider the question Why doesn't Tiger Woods mow his own lawn? Woods is an excellent golf player. But he also may be excellent at mowing. Still, if he devotes time to mow ...
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  • 850
17 votes
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Why do low-budget films charge the same amount at the box office as super-high budget films?

Opportunity Cost of the Seats Once the movie is made the cost of production is sunk and irrelevant to the proper pricing of tickets. Only the marginal costs of serving an additional customer and the ...
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  • 15.9k
16 votes

Is scalping tickets harmful?

There is a good Planet Money episode on ticket scalping; I recommend it. The reason for banning ticket scalping has nothing to do with economic harm, and everything to do with making the arts (or ...
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16 votes

Should I stay or should I quit?

Check out sunk cost. Although this might seem completely counterintuitive, the investment you have made should be irrelevant to your decision to stay or quit, if this investment has already been made ...
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