PART A Flashcards

1
Q

Completeness

A

A consumer either prefers one of the bundles to the other, or is indifferent between the two bundles

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2
Q

Transitivity

A

If consumer prefers bundle A to B, and prefers B to C, then consumer should prefer bundle A to C. Similarly if indifferent

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3
Q

Monotonicity

A

Any marginal increase in the quantity of a good generates an increase in a consumer’s utility.
More is better!

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4
Q

Indifference Curve

A

Represents different levels of utility a consumer derives from consuming different combinations of goods.

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5
Q

Budget Constraint

A

Possible combinations of two goods that can be purchased given a specific budget

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6
Q

MRS

A

Gradient of IC. Maximum amount of one good the consumer would be willing to sacrifice in order to obtain one more unit of another good.

MRS = -MUx/MUy

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7
Q

MRT

A

Gradient of BC. The amount of one good that must be forgone to produce an additional unit of another good while keeping the overall level of production constant.

MRT = -Px/Py

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8
Q

MRTP

A

Rate at which individuals value present consumption compared to future consumption. It represents the trade-off between consuming resources now versus saving or investing them for future consumption.

Gradient of IC between C1 and C2 as axis

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9
Q

MRTS

A

rate at which one input can be substituted for another in the production process while keeping the level of output constant. MPL/MPK

Gradient of Isoquant with Labour (Y axis) and Capital on axis

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10
Q

Interior Solution

A

Interior solutions exhibit optimal quantities that are positive for both goods,

At such a point, notice the following condition holds because the slope of the IC equals the slope of the BC.

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11
Q

Corner Solution

A

Sometimes, an interior solution may not exist because there is no possible point where MRS=MRT

Highest IC the consumer can reach where the optimal quantity of one of the goods is zero. This will occur when the MRS is greater or less than the MRT.

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12
Q

Utility possibilities frontier

A

Shows combinations of consumer A and B utility that correspond to contract curve. For a certain level of persons A utility what is the max utility B can have

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13
Q

Normal good

A

βˆ‚π‘žY/βˆ‚M > 0

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14
Q

Inferior good

A

βˆ‚π‘žY/βˆ‚M < 0

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15
Q

Substitutes

A

πœ•π‘žX /πœ•π‘π‘Œ > 0

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16
Q

Complements

A

πœ•π‘žπ‘‹ /πœ•π‘π‘Œ< 0

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17
Q

Independent goods

A

πœ•π‘žπ‘‹ /πœ•π‘π‘Œ= 0

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18
Q

Ordinary good

A

πœ•π‘žπ‘Œ /πœ•π‘π‘Œ< 0

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19
Q

Giffen good

A

πœ•π‘žπ‘Œ /πœ•π‘π‘Œ> 0

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20
Q

Income elasticity

A

% change in qy/ % change in M

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21
Q

Cross price elasticity

A

% change in qx / % change in px

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22
Q

Substitution effect

A

The change in demand, holding the other price and utility constant. Purely the impact of a change in relative prices.

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23
Q

Income effect

A

The change in demand resulting from the change in real income or purchasing power.

24
Q

Slutsky equation

A

Ξ΅ = Ξ΅*-Ξ·ΞΈ

Total Price Elasticity = Substitution price elasticity -income elasticity x budget share of good

25
Q

Compensating variation

A

Change in income that the consumer would need to restore his original utility.

26
Q

Equivalent variation

A

Change in income that would provide an equivalent change to the consumer’s utility.

27
Q

Choice overload

A

Individuals are presented with too many options, making it difficult for them to make a decision. People may feel overwhelmed, experience decision fatigue, and struggle to make a confident and satisfying decision.

28
Q

Loss averse

A

People strongly prefer avoiding losses over acquiring equivalent gains

29
Q

Risk averse (diagram)

A

Choose expected value over taking the gamble

30
Q

Laffer curve

A

There is an optimal tax rate that maximizes government revenue, beyond which further increases in tax rates can actually lead to a decrease in revenue.

31
Q

Isoquants

A

Possible combinations of factors (labour and capital) that, when used efficiently, generate a given level of output. Returns to labour and capital diminishing (convex). How much extra labour required to give up 1 unit of capital. This increases the more labour/less capital you have

32
Q

Isocost

A

Possible combinations of inputs that constitute a given total cost, C .
For a wage rate, w, and capital rental rate, r, an isocost line, can be described by C = wL + rK.

33
Q

Shutdown rules (diagram)

A

Shutdown Rule (in the LR)
In the LR, firms do not need to incur any fixed capital costs. Shutdown if profits are negative, if revenues are less than total costs:
pq < C(q) …. or if we divide by q: p < AC(q)

Shutdown Rules (in the SR)
In the SR however, the firm has to pay its fixed capital costs, F, regardless of its output choice. Shut down if
pq < VC(q)
or if we divide by q:
p < AVC(q)

34
Q

Price floor

A

Government-imposed minimum price set above the equilibrium price in a market. It is a form of price control that aims to ensure that the price of a good or service does not fall below a certain level. The intention behind implementing a price floor is typically to protect producers or workers in industries where the market price may be considered too low to sustain their livelihoods or operations.

35
Q

Price ceiling

A

Government-imposed maximum price set below the equilibrium price in a market. It is a form of price control that aims to limit the price that can be charged for a particular good or service. The intention behind implementing a price ceiling is typically to protect consumers from high prices or to ensure affordability in essential goods or services.

36
Q

Lerner index

A

The Lerner Index is an index of firm market power. It is also another way to examine how elasticity affects a monopoly’s price relative to its MC.
* Competitive firms have a Lerner Index of 0.
* The Lerner Index gets closer to 1as a firm has more market power
(p-MC)/p = -1/e

37
Q

Ad valorem tax

A

% of the item’s value.

38
Q

Specific tax

A

fixed value based on quantity

39
Q

Tax incidence

A

Distribution of the burden of a tax between buyers and sellers in a market. It examines who bears the actual economic burden of a tax, whether it is the consumers (buyers), producers (sellers), or both.

40
Q

Natural Monopoly (diagram)

A

A single firm can produce and supply a good or service more efficiently and at a lower cost than multiple competing firms. It arises when economies of scale are so significant that they create a high barrier to entry, making it economically impractical for other firms to enter the market and compete effectively.

41
Q

Perfect PD

A

Under perfect price discrimination, the firm charges each consumer a price that is exactly equal to the maximum he/she is willing to pay. 0 CS

42
Q

Multimarket PD

A

Firms divide potential customers into two or more groups (based on some easily observable characteristic, demand elasticity matters) and set a different price for each group.

43
Q

Quantity PD

A

Price varies with quantity purchased, but each
customer faces the same nonlinear pricing schedule.

44
Q

Block pricing

A

Pricing strategy used by companies to offer different price levels or tiers based on the quantity or volume of a product or service purchased. Under block pricing, the price per unit varies depending on the quantity or block of units purchased.

45
Q

2 part tariff

A

The firm charges a consumer a lump-sum fee for the right to purchase (first tariff) and a per unit fee for each unit actually purchased (second tariff).

46
Q

Nash Equilibrium

A
47
Q

Endowment point

A

Point where resources are initially allocated. From here they trade to a Pareto efficient point

48
Q

Risk Neutral

A

An individual or entity is indifferent or neutral towards risk. In other words, a risk-neutral individual assigns no additional value or cost to the uncertainty or variability associated with different outcomes. They make decisions solely based on the expected values of outcomes, without considering the level of risk involved.

49
Q

Market for Lemons (diagram)

A

The Market for β€˜Lemons’ - refers to a situation in which the presence of information asymmetry between buyers and sellers leads to adverse selection and a deterioration of the quality of goods or services being traded in a market.

50
Q

Signalling

A

Refers to the strategic actions taken by one party to convey information to another party in order to influence their behavior or beliefs. It is a way for individuals or firms to communicate private information to others and overcome information asymmetry.

51
Q

Screening

A

A strategy used by one party to gather information about another party’s characteristics or attributes that are not directly observable. It is a way to address information asymmetry by inducing the other party to reveal their private information.

52
Q

Pooling Equilibrium

A

When everything is sold together at same price

53
Q

Separating Equilibrium

A

Different goods sold at different prices

54
Q

Sunken Costs

A

Costs that have already been incurred and cannot be recovered

55
Q

Negative Externality

A

A negative externality is a concept in economics that refers to a cost or impact imposed on a third party who is not directly involved in a transaction or activity. It occurs when the production or consumption of a good or service causes spillover effects that result in harm or costs to individuals or society at large.

56
Q

Property rights

A

Legal and enforceable rights individuals or entities have over resources, assets, or properties. They define the ownership, control, and use of tangible and intangible assets and provide individuals with the ability to exclude others from using or benefiting from those assets without their permission.

57
Q

Public good

A

Good or service that is non-excludable and non-rivalrous in consumption, meaning that it is available to all individuals in a society and one person’s consumption of the good does not diminish its availability for others. Typically provided by the government because they may not be adequately supplied by the market