Midterm Flashcards
(19 cards)
Rational
An agent selfishly maximizing their utility
Surplus
The difference between transaction price and willingness to pay
Social Welfare
The sum of everyone’s utility
Free Market
Transactions are voluntary
Incentives
Linking an agent’s utility to some action or outcome
Opportunity Cost
The value of the best foregone alternative
Willingness-to-Pay
The total utility an agent gets from a good
Transfer Seeking
Any activity that tries to increase one’s share of wealth, without creating new wealth
Adam Smith’s Invisible Hand
Individual self-interest, when operating in a competitive market, can lead to positive social outcomes, even without anyone intending it.
Production/Management Efficiency
Creating the same output with fewer inputs.
Usually occurs, since firms are profit maximizing, and those who aren’t management efficient get driven out
X-Inefficiency
Not being management efficient, or minimizing costs
Pareto Efficient
No reallocation of resources is possible to make at least one person better off, without making someone else worse off. No DWL
Doesn’t occur under imperfect competition, information asymmetry, externalities, and public goods.
Pareto Improvement
A reallocation of resources makes one person better off without making anyone else worse off.
Potential Pareto Improvement
A re-allocation of resources makes at least one person so better off, that it negates making someone else worse off
Deadweight Loss
Deviation from Pareto Efficiency. “Money left on the table that could have been realized through mutually beneficial transactions”.
Normative vs. Positive
Normative: What policy makers should do
Positive: What policy makers actually do
