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Econ Foundations > Chapter 1 > Flashcards

Chapter 1 Flashcards

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1
Q

What does REMM stand for?

A

Resourceful, Evaluative, Maximizing Model (Nature of Man - Jensen and Meckling)

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2
Q

REMM Postulates

A

1)Every individual care; he or she is an evaluator (everyone cares about almost everything - willing to make trade-offs and substitutions), 2)Each individual’s wants are unlimited (prefers mores tudd to less), 3)Each individual is a mazimizer

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3
Q

Things we hold constant in SD analysis

A

1) Price of related goods,
2) price expectation
3) income
4) population
5) preferences

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4
Q

Normal and Inferior Goods

A

Normal - income goes up, demand increases and demand curve shifts to the right;
Inferior - income goes up, opposite happens

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5
Q

Expected future prices

A

if you expect prices to go up in the future, they’ll go up today

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6
Q

Shortage equation

A

Quantity Demanded - Quantity Supplied

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7
Q

Surplus equation

A

Quantity Supplied - Quantity Demanded

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8
Q

Elasticity of Demand

A
  • Def - how change in price impacts the quantity demanded

- (percentage change in quantity)/(percentage change in price);

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9
Q

Inelastic vs. Elastic

A

Inelastic means change in price doesn’t impact change in demand- perfect means no matter what price, same amt demanded - vertical line.; elastic means change in price changes demand; E>1 - elastic; E=1 - unit elastic (revenue is maximized at this point); E

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10
Q

Production possibilities frontier (PPF)

A

making best use of your time

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11
Q

allocative efficiency

A

where marginal costs = marginal benegits

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12
Q

marginal utitlity and marginal benefit

A

Marginal utility - when the consumption of an additiona litem increases the utility; marginal benefit- the max amt someone will pay to consume an additional unit of a good or service.

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13
Q

indifference curve

A

the locus of various points showing different combinations of two goods providing equal utility to the consumer. .slope of indifference curve at a certain point is the marginal rate of substitution. Nomal goods look like a curve or porabola. Perfect substitutes looks like a linear like.

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14
Q

explicit opp cost, implicit opp cost

A

explicit- whatever it costs to run business (rent, payroll, equipment); implicit - wages forgone, if you have to devote all your time to running this business (if negative, you;d make more money doing something else).

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15
Q

accounting vs economic profit

A

accounting - if business is making income; economic - whether it makes sense to run a business (Taking into account opportunity costs).

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16
Q

opportunity cost of capital

A

accounting for capital that could have been used for something else.

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17
Q

fixed vs variable costs

A

fixed - rent and employees; variable - cost of materials and transportation of goods

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18
Q

Total Cost

A

fixed + variable

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19
Q

avg fixed cost

A

fixed cost/ output

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20
Q

avg variable cost

A

variable cost/ output

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21
Q

avg total cost

A

sum of avg fixed cost + avg variable cost; or total cost/output

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22
Q

marginal cost

A

incremental cost of next unit of output; (diff in total cost)/(diff in output); impact of a small change in one variable on another variable

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23
Q

marginal revenue

A

how much you get for units of output per quantity produced

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24
Q

optimal amount to produce

A

PRoduce as much as possible until Marginal Cost = Marginal Revenue

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25
Profit per unit
Marginal revenue - avg total cost (up to the point where MR =MC)
26
Long term supply curve
when demand curve shifts, the supply curve will to, but eventually corrects back to the original curve (long term supply curve)
27
Marginal product revenue (MPR) curve
how much more money you make for the additional units you can produce
28
how many ppl you hie under MPR curve
keep hiring until MPR curve = marginal cost curve
29
perfect competition
many players with identical products; no barrier to entry; no advantage for existing firms; really good price info for buyers and sellers;
30
cartel
they have a formal agreement to look/act more like a monopoly
31
Nash equilibrium
each party takes optimal choice given what the other will do. Stable system that involve interacting participants in which no participant can gain by a chance of strategy as long as all other participants remain unchanged.
32
positive vs normal analysis
positive - explains why we have current legal rules; scientific methods, factual "What it is;" Normatiove - How could the change sin the law improve welfare? (value judgement; what it should be)
33
Pareto efficiency
the welfare of one cannot be improved without the reducing of welfare of another
34
Kador-Hicks efficiency
change will make winners sufficiently better off to compensate losers
35
opportunity cost
value of forgone option
36
economic cost vs. accounting cost
what you actually lose/gain form giving something up and and taking something else' accounting cost - what's on the books
37
rationality assumption
we assume that people and firms are rational actors
38
ex post vs. ex ante analysis
ex post - decisions based on the past; ex ante - decisions based on the future
39
capitalistic market economy
basis of US econ syste - taps into person's self interest in a manner that encourages him to put resources ot most highly valued use
40
transaction cost
???
41
law of demand
as prices rise, quantity demanded falls, holding all else constant
42
Diminishing marginal utility
additional utility received by a person from the consumption of an additional good
43
individual demand
individual's marginal willingness to pay for a good
44
market demand
aggregation of each individiual consumer's demand
45
consumer surplus
difference between maximum amt consumer is willing to pay and actual payment made
46
diff b/w change in quantity demanded and change in demand
QD - moves along demand curve; D - change in price and quantity demanded (shifting curve)
47
Elastic Demand
- buyers are very responsive to price changes- when demand for a product is elastic, an increase in price leads to a decrease in total revenue.
48
Inelastic demand
buyers not responsive to price changes; when demand for product is inelastic, an increase in price leads to an increase in revenue
49
unitary elastic
buyers keep up with price changes. Total revenue is maximized at point where demand is unitary elastic?????
50
Supply
relationship b/w price and the quantity supplied. Law of supply - quantity supplied rises as price rises.
51
supply curve
quantities of a good or service that a firm is willing to supply at any given price
52
market supply
aggregation of each individual firm's supply curves. Opportunity cost says that lowest cost resources come into use first.
53
Diff in change in quantity demanded and change in supply
meow
54
supply elasticity
responsiveness of quantity supplied to changes in price. Elastic supply - suppliers very responsive to price increase; inelastic - supply not responsive to changes in price
55
Market price
price that prevails at equilibirum - pt where S and D meet
56
price ceiling
cap on max price - must be set below mkt clearing price to have an impact on mkt behavior. When there is an impact, the quantity demanded is greater than the quantity supplied, resulting in shortage, but price ceiling prevents correction to equilibrium. (ex. rent control, price gouging laws)
57
shortage
when quantity demanded is greater than quantity supplied.
58
price floor
prevents sale below certain minimum level. Floor must be set above mkt clearing price to have an impact on behavior. (ex. minimum wage)
59
Deadweight loss of tax
by raising marginal costs above actual costs, some value-creating exchanges don't take place. Amt of deadweight loss depends on demand elasticity (less deadweight if demand inelasticity, more with elasticity). WIth elastic demand - producers pay the tax burden, with inelastic demand - consumers pay it.
60
Definite ending pt with game theory
each team will cooperate til the last round and then cheat, but since everyone suspect each other of cheating, ppl will cheat at beginning (backwards induction).
61
Indefinite ending point w/ game theory
players not sure how long they'll play game, so less likely to cheat. IF immediate benefit in greater than diffference in cost by cheating - pays to cheat. If immediate benefit is less than or equal to difference in cost lost by cheating then it pays not to cheat (this leads to nash equilibirum). (ex. collusion)
62
factors that will sustain collusion in indefinite end point
ability to monitor actions of rivals, ability to punish defectors, low interest rates, higher probability of future interaction
63
3 components of property rights
1)right to use, right to exclude, right to transfer
64
benefits of property rights
- internalization of benefits, so efficient use; - receive full benegit - save money on theft - more efficient allocation - invest efficiently in future- - transfers to highest value user
65
Externalities
exist when the actions of one party effect another 3rd party. Negative extenalities - bad side effect on 3rd party (ex. pollution)
66
solution to externalities
- regulations - set Q=Q* - forcing quantity produced down; - tax/subsidy - set a per unit tax or subsidy equal to amount of externality - liability - require injurer to pay victims for harm
67
Coase Theorem
By assigning property rights, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. Assumes zero transaction cost.
68
"reciprocal nature of harm"
Coase theory, basically, not onl does the pollution cause an externality, but the presence of the victims harms the polluter
69
public good
a good where one individual's consumption does not reduce or exclude the ability of other individuals to consumer the good (eg natl defense).
70
non-rival public good
when the quantity for others doesn't diminish when consumed by one person
71
non-excludable public good
prohibitively costly to provide the good only to people who can pay for it while preventing or excluding other ppl from obtaining it.
72
patent thicket
monop rights hinder follow-on inventions
73
MGM v. Grokster
???
74
optimal level of ignorance
?????
75
Marketplace info
1) public (eg prices), 2)private (ie quality - can't tell from appearance)
76
Private info about quality
1) experience goods - don't know quality til you experience; | 2) credence - trust someone else that it's good
77
assymetric info
one party to a transaction knows a material fact that other doesn't. Lemons- reduces avg quality of goods offered for sale. Ppl with shitty goods sell them. Bc mkt prices are low, sellers of high quality goods are reluctant to sell.
78
advertising
Cuts search cost (cost of obtaining info abt price and products). Info and reputational ads.
79
Branding
- helps consumers bc w/o brand name, no way to identify cheating firm and punish - when firms cheat reputational sanctions for low quality - firms have more to lose from the costs of damaging their brand name than costs from litigation and regulation
80
Fanchising
- most valuable asset is the franchisor's brand - franchisees have an incentive to shirk on quality expenditures and free ride off the experience of others in the chain - franchisors have at-will termination clauses
81
hold up problem
situation where two parties may be able to work most efficiently by cooperating, but refrain from doing so due to concerns that they may give the other party increased bargaining power, and thereby reduce their own profits.. Adds economic cost and leads to underinvestment.
82
legal treatment for hold-up problem
- CL pre-existing duty rule - requires new consideration for K modifications - UCC and 2nd restatement - UCC requires good faith for K mod
83
Expected value
P x V (probability x value) [torts]
84
Expected utility
(1st probability x utility) + (2nd probabillity x utility)
85
risk averse equation
expected utility
86
risk seeking equation
utility > expected utility
87
risk neutrality
expected utility = utility
88
Ways to reduce risk
- Insurance - Ks - Regulation
89
Problems w/ Insurance
- adverse selection - when the potentially insured known more about their own risk than the potential insure; - moral hazard - tendency for insured party to take risks that otherwise wouldn't if they were uninsured
90
why negligence and strict liability scheme
``` optimal deterrence (ex ante) social justice (ex post) ```
91
Economic Theory of Torts
- minimize accident costs and avoidance costs | - U.S. v. Carroll Towing (Learned Hand barge case)- B
92
negligence scheme equations
x> or = x* - no liability (x= level of care (cost)) | x
93
strict liability scheme equations
- injurer takes x* bc it is stuck with loss | - Pay P x H regardless (P=probability of harm; H = harm caused)
94
Economic justifications for products liability
- firms are in the best position to prevent consumer injury from their product (producer is the least cost avoider) - Firms are best able to appreciate the residual risk of their products after taking care, and hence adjust price to reflect true cost (Doe v. Miles Labs) - consumers don't know risk, producers do; - Firms can provide lower cost insurance by spreading over population of purchasers (bundle into price of good)
95
Punitive damage justifications in tort law
- optimal deterrence | - punish bad behavior
96
Perfect competition assumption
- individual firms too small to affect mkt price - perfect information - homogeneous product - free entry and exit
97
Profit maximization formula
marginal revenue = marginal cost; or stop producing right before MR
98
Profit formula
TR - TC
99
Avg total cost (ATC)
TC/Q
100
productive efficiency
produce at lowest possible cost
101
Dynamic efficiency
competition over time reduces costs and improves quality
102
How to firms obtain mkt power
- steep demand curce - relaxed assumptions from perfect competition (differentiated products, imperfect information, barriers to entry, prive agreements to restrain competition, public policies that restrict competition)
103
consequences from monopoly
- deadweight loss | - rent seeking
104
rent seeking
When a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation
105
cross price elasticity
(% change in quantity demanded of good X) / (% change price of good Y)

Econ Foundations (1 decks)

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