Week 1 Flashcards
(32 cards)
Wat are the first 4 principles of economics? (How do people make decisions)
- People face trade-offs
- The cost of something is what you give up to get it
- Rational people think at the margin
- People respond to incentives
What are the last 3 principles of economics? (How people interact)
- Trade can make everyone better off
- Markets are usually a good way to organize economic activity
- Governments can sometimes improve market outcomes
What are opportunity costs?
Opportunity cost is de kosten die een persoon of organisatie betaalt voor het maken van een bepaalde keuze in plaats van een andere keuze.
Dit betekent dat de kosten die je hebt betaald voor de gekozen optie het bedrag is dat je niet hebt kunnen uitgeven aan een andere optie.
Ook wel: Je kunt het maar één keer uitgeven.
What are marginal changes?
Small incremental adjustments to a plan of action
Rational decision maker – take action only if Marginal benefits > Marginal costs
What is the first law of supply?
The higher the market price the greater the quantity supplied by each firm.
What is the first law of demand?
The higher the price, the lower is quantity demanded.
What is Adam Smith’s invisible hand?
Markets are usually a good way to organize economic activity guided by prices and self interest.
What will Adam Smith’s invisible hand cause?
A market equilibrium price where supply and demand find each other.
What is the definition of market failure?
Situation in which the market on its own fails
to produce an efficient allocation of resources.
Causes for market failure:
* Externality: Impact of one person’s actions on the well-being of a bystander
* Market power: Ability of a single person (or small group) to unduly influence market prices
What is the definition of utility?
Consumption of ‘goods’
What is marginal utility?
Utility is assumed to be increasing in
the quantities of the goods consumed.
Marginal utility is instead assumed to
decrease with consumption.
What does an indifference curve show?
The indifference curve shows all
combinations of x and y (consumption
bundles) between which the individual is
indifferent – i.e. these yield same utility.
The consumer is indifferent between
the combination (x1,y1) and (x2,y2) –
both lead to U1.
What shows a higher indifference curve?
Higher curves, more utility already signals
that more of goodthings is always better (preferred)
So a higher curve means more utility and they never cross
Why are indifference curves convex?
Indifference curves are convex:
shows we like ‘averages more than
extremes’ (not only X or Y) –
compare diminishing marginal utility
What are the four core concepts in economic rationality?
- Completeness
- Monotonicity
- Transitivity
- Self-interest
What does completeness mean?
For all possible alternative options (A and B), an individual either prefers A over B, B over A or is indifferent between them.
Preferences exist for all options (complete ordering and information)
This means that all alternative states / bundles / pairs can be compared to each other and people can indicate for any combination whether their utility increases, decreases or stays the same moving from A to B.
What does transitivity mean?
Transitivity means a logical and internally consistent ordering of goods
If you prefer A over B, and B over C, then you must prefer A over C
Or: A ≻ B and B ≻ C, then A ≻ C
Example: If you like bananas more than oranges and oranges more than grapes, than you must like bananas more than grapes.
What does monotonicity mean?
This simply means: more goods is better…
Your utility goes up (albeit at a diminishing speed) with more goods
Preferences are labelled as weakly monotonic if given some consumption bundle an individual prefers all consumption bundles that have more of all goods in the bundle.
Preferences are labelled as strongly monotonic if given some consumption bundle an individual prefers all consumption bundles that has at least more of one good in that bundle (and none less).
This is not a core component, but it is reffered to completeness. What is continuity?
Continuity is if you prefer A over B, anything very similiar to A, is also preferred over B.
How do you calculate expected utility?
E(U)= prob_a(outcome a) + (prob_b)(outcome b)
What is the difference between positive and normative?
Positive: Is based on facts (Positive (descriptive) = understand and describe observed choices)
Normative: Is based on value judgments (Normative (prescriptive) = define and prescribe ‘optimal’ choices)
What are the determinants of a good?
- Price of the commodity (full price)
- Prices of other commodities (can be compliments or substitutes)
- The income (wealth) of the individual
- The preferences (tastes) of the consumer
What does consumer surplus mean and where can you find it in the equilibrium?
It means profit: So when a certain price is determined, some consumers will have profit because, this price is lower than what some consumers would have wanted to pay for. When the price increases the consumer surplus will decrease. You can find it left above the equilibrium.
What does producer surplus mean and where can you find it in the equilibrium?
It means profit: So when a certain price is determined, some producers will have profit. Because the price is higher than what some producers would have wanted their good to offer for. When the price increases the producer surplus will increase too. You can find it left under the equilibrium.