KEY DEFINITIONS Flashcards
(19 cards)
Acting as an economically rational agent
Selfishly Maximizing my own anticipated utility
Surplus in economics
Benefit or Gain each party gets from a transaction
There are two sides to every transaction (e.g., a
buyer and a seller). Surplus in a transaction is
(best answer):
The difference between the utility of having the good and the utility of the transaction price
Social Welfare
The sums of everyones utility
Free Market is one where
Goods are priced at Marginal Cost
Acting Rationally
Selfishly Maximizing my own anticipated utility
Pareto-Efficiency
An outcome is Pareto-efficient if no one can be made better off without making someone else worse off. It’s a useful benchmark, but not the same as fairness or maximum social welfare.
Maximizing Social Welfare Assumptions
- Is the role of goverment to maximaze social welfare
- Social Welfare can increase through redistribution
- Trade in free markets will increase social welfare
Institutions
Created to govern how transactions take place and redistribute wealth
Policy
Set of rules created and enforced by a governing body
Normative
what a policy should do
Opportunity Cost
The value of the best foregone alternative.
Exclude Sunk Costs (Expenses that cant be recover)
Include Implicit Costs (non-monetary opportunity costs of using resources you already own, instead of renting, selling, or deploying them elsewhere.)
Transfer Seeking
This is when individuals, businesses, or interest groups try to grab a larger slice of the economic pie without making the pie any bigger.
Definition: Any activity that increases one’s share of existing wealth without creating new wealth.
Moral Hazards
When someone has an incentive to take more risks or put in less effort because they don’t bear the full consequences of their actions.
Paradox of Value
Refers to the apparent contradiction that essential goods (like water) often have a low market price, while non-essential goods (like diamonds) have a high price, despite being less important for survival.
Price is determined by marginal utility, not total utility.
Marginalism
Principle that decisions should be made based on the additional (marginal) costs and benefits of a small change in activity, rather than totals or averages.
Don’t ask: “Is this good overall?”
Ask: “Is doing a bit more (or less) worth it right now?”
Unintended Consequences – Definition
Unintended consequences are outcomes that occur as a result of a policy or action, but were not intended or foreseen — and they often undermine the original goal.
The Peltzman Effect (a type of unintended consequence):
When safety regulations make people feel safer, they may take more risks, offsetting the intended benefits.
Example:
Safer cars → more reckless driving
Helmets → more aggressive biking
