Explanations
Thirteen questions, one clear answer each.
Each page answers one question with a worked example and FAQ. Written for AP Micro, AP Macro, IB, and Econ 101 students who want the concept to actually click.
Why does the demand curve slope downward?MicroThe substitution effect, the income effect, and diminishing marginal utility all push the same way: people buy less as price rises. With a worked example.Read the answerWhy do price ceilings cause shortages?MicroA binding ceiling sits below the equilibrium price, so quantity demanded exceeds quantity supplied. Step-by-step explanation with a worked example.Read the answerWhy do price floors cause surpluses?MicroA binding floor sits above the equilibrium price, so quantity supplied exceeds quantity demanded. The minimum wage is the classic example.Read the answerWhy does a monopoly produce where MR = MC?MicroWhile marginal revenue beats marginal cost, each extra unit adds profit. The crossover MR = MC sets the quantity; the price is read up on the demand curve.Read the answerWhy do monopolies create deadweight loss?MicroMonopolists set MR = MC and restrict output below the competitive level. The triangle between demand and MC, from Qm to Qc, is the deadweight loss.Read the answerWhy does a per-unit tax create deadweight loss?MicroA tax drives a wedge between buyer and seller prices, shrinking the quantity traded. The surplus on the trades that no longer happen simply vanishes.Read the answerWhy does government spending have a multiplier?MacroOne dollar of spending becomes someone's income, part of which they spend, becoming the next person's income. The chain lifts GDP by more than the first dollar.Read the answerWhy is the tax multiplier smaller than the spending multiplier?MacroGovernment spending enters the economy in full; a tax cut is partly saved before it ever circulates. That gap is why the tax multiplier is smaller.Read the answerHow do banks create money?MacroBanks lend out most of every deposit, and those loans become new deposits elsewhere. Repeated, the process multiplies the money supply beyond the original cash.Read the answerWhy is the short-run Phillips curve downward sloping?MacroLow unemployment and high inflation tend to arrive together: tight labour markets bid up wages and prices while inflation expectations stay fixed.Read the answerWhy is the long-run Phillips curve vertical?MacroIn the long run, expectations catch up with inflation, so there is no lasting trade-off between inflation and unemployment. The curve stands at the natural rate.Read the answerReal vs. nominal GDP: what's the difference?MacroNominal GDP values output at this year's prices; real GDP holds prices fixed so only the amount produced moves. The gap between them is pure inflation.Read the answerWhy does inflation help borrowers and hurt savers?MacroUnexpected inflation shrinks the real value of fixed debts. Borrowers repay in cheaper dollars; lenders and savers get back money that buys less.Read the answer
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