Key definitions

Question 1

Equilibrium

Answer 1

A model outcome that is self-perpertuating. In this case, something of interest does not change unless an outside or external force is introduced that alters the model’s description of the situation.

Question 2

Subsistence level

Answer 2

The level of living standards measured by consumption or income such that the population will not grow or decline.

Question 3

Ceteris paribus

Answer 3

Ceteris paribus is what economics do to simply analysis by setting aside things that are thought to be of less importance to the question of interest. It means to hold other things equal, thus in economic models it holds other things constant.

Question 4

Incentive

Answer 4

Economic reward or punishment, which influences the benefits and costs of alternative courses of action.

Question 5

Relative price

Answer 5

The price of one good or service compared to another usually expressed as a ratio.

Question 6

Economic rent

Answer 6

A payment or other benefit recieved above and beyond what the individual would have recieved in his or her reservation option (next best alternative)

Question 7

Reservation price

Answer 7

A person’s next best alternative among all options in a particular transaction.

Question 8

Dominated

Answer 8

We describe an outcome in this way if more of something that is positively valued can be attained without less of anything else that is positively valued. In short: an outcome is dominated if there is a win-win alternative.

Question 9

isocost lines

Answer 9

A line that represents all combinations that cost a given total amount.

Question 10

Entrepreneur

Answer 10

A person who creates or is an early adopter of new technologies, organizational forms, and other opportunities.

Question 11

Creative destruction

Answer 11

Joseph Schumpeter’s name for the process by which old technologies and the firms that do not adapt are swept away by the new, because they cannot compete in the market. In his view, the failure of unprofitable firms is creative because it releases labour and capital goods for use in new combinations.

Question 12

Factors of production

Answer 12

The labour, capital, land and other inputs to a production process.

Question 13

Average product

Answer 13

Total output divided by a particular input, for example per worker or per worker per hour.

Question 14

Diminishing average product of labour

Answer 14

A situation in which, as more labour is used in a given production process, the average product of labour typically falls.

Question 15

Innovation rents

Answer 15

Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organization form or marketing stratergy.

Question 16

Production function

Answer 16

A graphical or mathematical expression describing the amount of output that can be produced by any given amount or combination of input(s). The function describes differing technologies capable of producing the same thing.

Question 17

Marginal product

Answer 17

The additional amount of output that is produced if a particular input was increased by one unit, while holding all other inputs constant.

Question 18

Diminishing returns

Answer 18

A situation in which the use of an additional unit of a factor of production results in a smaller increase in output than the previous increase.

Question 19

Tangent

Answer 19

When two curves share one point in common but do not cross. The tangent to a curve at a given point is a straight line that touches the curve at that point but does not cross it.

Question 20

Preferences

Answer 20

A description of the benefit or cost we associate with each possible outcome.

Question 21

Utility

Answer 21

A numerical indicator of the value that one places on an outcome, such that higher valued outcomes will be chosen over lower valued ones when both are feasible.

Question 22

Indifference curve

Answer 22

A curve of the points which indicate the combina­tions of goods that provide a given level of utility to the individual.

Question 23

Marginal rate of substitution

Answer 23

The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve.

Question 24

Opportunity cost

Answer 24

When taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative.

Question 25

Economic cost

Answer 25

The out-of-pocket cost of an action, plus the opportunity cost.

Question 26

Feasible frontier (Same as PPF)

Answer 26

The curve made of points that defines the maximum feasible quantity of one good for a given quantity of the other.

Question 27

Marginal rate of transformation

Answer 27

The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier.

Question 28

Constrained choice problem

Answer 28

This problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce.

Question 29

Budget constraint

Answer 29

An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one’s budgetary resources.

Question 30

Income effect

Answer 30

The effect that the additional income would have if there were no change in the price or opportunity cost.

Question 31

Substitution effect

Answer 31

The effect that is only due to changes in the price or opportunity cost, given the new level of utility.

Question 32

Scarcity

Answer 32

A good that is valued, and for which there is an opportunity cost of acquiring more.

Question 33

Strategic interaction

Answer 33

A social interaction in which the participants are aware of the ways that their actions affect others (and the ways that the actions of others affect them).

Question 34

Strategy

Answer 34

An action (or a course of action) that a person may take when that person is aware of the mutual dependence of the results for herself and for others. The outcomes depend not only on that person’s actions, but also on the actions of others.

Question 35

Games

Answer 35

A model of strategic interaction that describes the players, the feasible strategies, the information that the players have, and their payoffs.

Question 36

Division of labour

Answer 36

The specialization of producers to carry out different tasks in the production process.

Question 37

Payoffs

Answer 37

The benefit to each player associated with the joint actions of all the players.

Question 38

Best response

Answer 38

In game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select.

Question 39

Dominant strategy

Answer 39

Action that yields the highest payoff for a player, no matter what the other players do.

Question 40

Dominant strategy equilibrium

Answer 40

An outcome of a game in which every player plays his or her dominant strategy

Question 41

Altruism

Answer 41

The willingness to bear a cost in order to benefit somebody else

Question 42

Reciprocity

Answer 42

A preference to be kind or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind.

Question 43

Prisoners’ dilemma

Answer 43

A game in which the payoffs in the dominant strategy equilibrium are lower for each player, and also lower in total, than if neither player played the dominant strategy.close

Question 44

Social preferences

Answer 44

Preferences that place a value on what happens to other people, even if it results in lower payoffs for the individual.

Question 45

Zero sum game

Answer 45

A gmae in which the payoff gains and losses of the individual sum to zero, for all combinations of strategies they might pursue.

Question 46

Free ride

Answer 46

Benefiting from the contributions of others to some cooperative project without contributing oneself.

Question 47

Public Good

Answer 47

A good for which use by one person does not reduce its availability to others. Also known as: non-rival good.

Question 48

Revealed preference

Answer 48

A way of studying preferences by reverse engineering the motives of an individual (her preferences) from observations about her or his actions.

Question 49

Cooperation

Answer 49

Participating in a common project that is intended to produce mutual benefits.

Question 50

Altruism

Answer 50

The willingness to bear a cost in order to benefit somebody else.

Question 51

Fairness

Answer 51

A way to evaluate an allocation based on one’s conception of justice.

Question 52

Sequential game

Answer 52

A game in which all players do not choose their strategies at the same time, and players that choose later can see the strategies already chosen by the other players, for example the ultimatum game.

Question 53

Simultaneous games

Answer 53

A game in which players choose strategies simultaneously, for example the prisoners’ dilemma.

Question 54

Minimum acceptable offer

Answer 54

In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. Generally applied in bargaining situations to mean the least favourable offer that would be accepted.

Question 55

Nash equilibrium

Answer 55

A set of strategies, one for each player in the game, such that each player’s strategy is a best response to the strategies chosen by everyone else.