Ch. 22 AP Microeconomics (The Frontiers of Microeconomics)

Terms	Definitions
Hidden action	Action taken by one party in a relationship that cannot be observed by another party, one of causes of asymmetric information.
moral hazard	The tendency of a person(the agent) who is imperfectly monitored by the principal(boss) to engage in dishonest or otherwise undesirable behavior. Can be reduced by delayed payment, high wages, or better monitoring.
Median voter theorem	Mathematical result that shows if voters are choosing a point along a line and each voter wants the point closest to his preferred point, then majority rule will pick the most preferred point of the median voter. Condorcet paradox actually does not arise in this situation.
Hidden characteristics	Things one party of a transaction knows about itself but which are unknown to the other party, one of the causes of asymmetric information.
Arrow's impossibility theorem	A mathematical result showing that, under certain assumed conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences. Conditions ae :No dictators, transitivity, unanimity, independence of irrelevant alternatives.
Asymmetric information	Situations in which buyers and sellers are not equally well informed about the characteristics of goods and services for sale in the marketplace
adverse selection	The tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party. (In other words the seller knows more about a product, then the buyer does, which causes "adverse" problems.)
agent	a person who is performing an act for another person(the principal)
principal	A person for whom another person, called the agent, is performing some act, otherwise known as a BOSS.
delayed payment	One of the ways the principal (boss) attempts to reduce the chance of moral hazard of his agent (employee), it works because the agent perceives that their will be a greater loss if he engages in undesirable behavior. Example : End of year bonus.
lemons problem	When buyer's can't tell if if the good they are buying is high-quality or low-quality. ex. Used Cars (people assume that since they are used, there is something wrong with them). Extreme Case- People with HQ goods don't want to sell for the low prices offered and so drop out, leaving only lemons (low quality goods).
Screening	An action taken by an uninformed party to induce an informed party to reveal information or reduce asymmetric information. For example : Interviews, Credit History, phone records, etc,.
Premium	The periodic amount of money the insured pays to a health plan for insurance coverage, insurance companies use this as away to screen between risky and safe people.
Political Economy	the study of government using the analytic methods of economics.
Condorcet paradox	The failure of majority rule to produce transitive preferences for society. Shows that the order that things are voted on effects the overall results.
transitivity	The ability to recognize relations among elements in a serial order (for example, if A > B and B > C, then A > C).
Broda count	A system where voters use numbers to mark their preferences for all the nominated candidates. preferences are assigned a value (1, .9 .8 .7 .6). Is supposed to counter and correct Condorcet paradox.
Kenneth Arrow	An American economist and joint winner of the Nobel Memorial Prize in Economics, proved that when there are 3 or more options it is impossible to aggregate individual preferences into a valid set of social preferences.
unanimity	state of total agreement or unity, one of the conditions of arrow's impossibility theorem.
Independence of irrelevant alternatives	A principle that the ranking between any two outcomes A and B should not depend on whether some third outcome C is also available , one of the conditions of arrow's impossibility theorem.
behavioral economics	The sub-field of economics that integrates the insights of psychology
satisficers	Decision makers who tend to settle for something that is satisfactory, even if it may not be ideal. Some economist believe that this term should replace the idea of rational customers.
ultimatum game	A game in which a proposer is given a sum of money and makes an offer to a responder as to how this money should be split between them. The responder must choose to accept or reject the offer. This game has been used to study people's decision-making strategies.