Chapter 1 + 2 Flashcards
(27 cards)
What is an Exogenous Variable?
Relating to or dependent on external factors
What is a model?
A simplified representation of reality
What is an Endogenous Variable?
Related to or dependent on internal factors
What is the “Optimization Principle”?
People try to choose the best patterns of consumption that they can afford.
What is the “Equilibrium Principle”?
Prices adjust until the amount that people demand of something is equal to the amount that is supplied.
Reservation Price
The highest price that a given person will accept and still purchase the good
Demand Curve
A curve that relates the quantity demanded to price.
What is a Competitive Market?
A market in which large numbers of producers compete with each other to satisfy the wants and needs of a large number of consumers.
Comparative Statics
Involves comparing two “static” equilibria without worrying about how the market moves from one equilibrium to another.
Monopoly
A situation where a market is dominated by a single seller of a product
Discriminating Monopolist
A single seller who makes different people pay different prices for the same good.
What are four possible ways of allocating a good?
The competitive market.
A discriminating monopolist.
An ordinary monopolist.
Rent control.
What is a Pareto improvement?
A situation where we can find a way to make some people better off without making anybody else worse off.
What makes an allocation Pareto inefficient?
If an allocation allows for a Pareto improvement.
What makes an allocation Pareto efficient?
If an allocation is such that no Pareto improvements are possible.
Budget Constraint
Represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income
Consumption Bundle
This is simply a list of two numbers that tells us how much the consumer is choosing to consume of good 1 and good 2
Budget Set
The set of affordable consumption bundles at prices (p1 , p2 ) and income m
Composite Good
Stands for everything else that the consumer might want to consume other than good 1.
Budget Line
The set of bundles that cost exactly m
Opportunity Cost
The value of the best alternative forgone
Numeraire Price
A good who’s price has been set to 1 and all other goods prices are measured relative to that.
Quantity Tax
The consumer has to pay a certain amount to the government for each unit of the good he purchases.
Ad Valorem Tax
A tax on the value—the price—of a good, rather than the quantity purchased of a good.
Also called a Value Tax
