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ECON 115 Vocab
Terms in this set (48)
is the value of the best forgone alternative. It is the cost of the best next choice available to you when you choose from various mutually exclusive choices.
Law of Demand
holds that as the price of a good increases, consumers' demand for that good should decrease.
Complement (in Demand)
A good that is purchased and used in combination with another good. When the price of a good goes up, the quantity demanded of a complement goes down, and conversely when the price of a good goes down, the quantity demanded of the complement will go up.
as opposed to normal goods, these goods become less dependent as income increases. For example: fast food. As we are wealthier, we move towards healthier, more expensive foods.
measures the benefit to buyers of participating in a market. For a particular consumer, it is measured by the amount the consumer is willing to pay for a good minus the amount the consumer actually pays for it. For the market, total consumer surplus is the area under the demand curve and above the price, form the origin to the quantity purchased.
is defined as the state in which the quantity supplied is equal to the quantity demanded. The equilibrium price p
is the price at which quantity supplied and demanded are equal. Equilibrium quantity is q
and is depicted below.
in a market is defined as the state in which the quantity supplied is equal to the quantity demanded.
is defined as who really bears the burden of a tax. It is the portion of the tax paid by buyers and sellers. For sellers, the tax burden is measured by the difference between the price sellers received for the good-before the tax-and the price they receive for the good after the tax, times the quantity sold after the tax. For consumers, the tax burden is measured by the difference between the equilibrium price before the tax and the price buyers pay for the good after the tax, times the quantity consumed after the tax.
is defined as the surplus/benefit to society generated due to an economic transaction. It is equal to the private surplus/benefit plus the external surplus/benefit.
is the ratio of the percentage change in one value to the percentage change in another. In the course we talk about price elasticity of demand. The price elasticity of demand is the percentage change in quantity demanded for a 1% change in price. A demand is inelastic when its elasticity magnitude is less than 1.
The set of bundles that are affordable given prices and income.
The set of all bundles that yield the same level of utility.
Marginal Rate of Substitution
The slope of the indifference curve. The MRS is the
ratio at which a consumer is willing to trade off two goods while maintaining the same level of utility.
A curve that represents all of the combinations of inputs that allow a firm or supplier to produce a particular output.
A curve that shows all of the input combinations that amount to the same cost.
The additional revenue received by a firm or supplier from selling one additional (or marginal) unit of output.
Marginal Revenue Product of Labor
The change in total revenue per unit change in labor (or for a one-unit change in labor)
Economic versus technical efficiency in production
i. Economic efficiency: Producer properly chooses input quantities to balance the relative cost of inputs with the relative productivity of the inputs.
ii. Technical efficiency: Producer uses all inputs efficiently and does not waste any inputs.
Average variable cost
Variable cost of production per unit of produced quantity.
the additional cost of producing one more unit.
Average Total Cost
Total cost of production per unit of produced quantity.
Long-run vs. short-run supply curve
i. Long-run supply curve: Supply curve when firms can freely enter and exit.
ii. Short-run supply curve: Supply curve when the number of firms is fixed as there is no entry and exit.
An allocation of resources is pareto inefficient if the same resources could be re-allocated to make everyone better off or at least to make someone better off without hurting anyone else.
The set of resource allocations that are all Pareto efficient. They form a line with a negative slope on a graph of the utilities of two actors.
A decisionmaker in an economy who typically attempts to bring about a pareto efficient outcome through policy decisions.
An allocation of goods where goods cannot be reallocated without making at least one individual worse off. The allocation of resources in a perfectly competitive equilibrium is a pareto-efficient allocation.
A situation where there is only one seller (producer) in the market. They produce where MR=MC.
A measure of a firm's market power. Where the Lerner index is high, the firm has a greater ability to price above its marginal cost, and so its market power is higher. The Lerner Index is equal to the "relative markup", that is to (P-MC)/P which is equal to the inverse of the demand elasticity 1/|Elasticity of Demand|
A monopoly where it is efficient for a single firm to produce the entire industry output (where the bigger a firm gets, the lower its average total cost). Splitting output across more than one firm would raise the average total cost of production.
Only a few number of firms compete in the market.
Each firm competes in quantity.
Each firm does the best of its own, given its beliefs about the other firm's behavior. No firm has an incentive to deviate at Nash Equilibrium as long as the other firm's behavior is given.
Products in an industry are differentiated if the consumers view the products of various firms as close but imperfect substitutes.
A collusion happens when two or more firms in a market coordinate to act as one firm and try to charge higher prices to consumers.
The Prisoner's Dilemma is a type of strategic interaction where players choose between cooperating or cheating. Each player's best response to the other is to cheat (regardless of whether the other cheats or cooperates). Therefore, the Nash equilibrium of the game is for both players to cheat.
2nd Degree of Price Discrimination
In this case, the firm cannot verify the consumers types or willingness-to-pay. Hence, the firm needs to offer a different version of the product so customers select the version they want.
When an action by someone causes a cost to another party with whom the decision maker has not engaged in a direct market transaction, this effect is a negative externality.
Non-Rivalry in Consumption
A good has non-rivalry in consumption if one's benefit does not diminish others' benefit. Examples of non-rival goods include national defense, clean air, street light, etc.
a good which features both non-rivalry and non excludability in consumption. A good has non-excludability if one cannot prevent anyone from consuming. A good has non-rivalry in consumption if one's benefit does not diminish others' benefit. Examples of public goods are national defense, public parks, roads, etc.
is a tax scheme intended to correct inefficient market outcome due to negative externality.
In the context of the provision of public goods via voting (under the assumption that each voter pays an equal share of the cost of funding), a median voter refers to a voter whose rank is the median of all voters when they are ranked in terms of their marginal utilities.
The value of a future sum of money today. The present value of x in period i today is given by
v0 =x/(1 + r)^i
The weighted average utility an individual receives in the face of uncertainty. The expected utility of a lottery paying yH with probability p and yL with probably (1 −p) is
EU = pu(y^H) + (1 − p)u(y^L)
means that when a person is presented with a choice between two options that have the same expected (or average) payoff, the person will choose the option with the more certain payoff (or less risk). So for the same average payoff, we have:
E[U(y)] < U[E(Y )]
A strategy to reduce risk by combining uncertain outcomes.
occurs when individuals self-select into insurance and, as a result, only those who have the worst risk buy insurance while those that are better do not.
occurs when an individual changes his/her behavior as a result of insurance. For example, having car insurance might induce an individual to become a riskier driver.
If firm 1 sets p1>mc
i. Best Response of firm 2 to this is to set p2 just a
bit below p1 and therefore capture the whole market
ii. Each firm responds in kind, until p1 = p2 =mc - just as in competitive equilibrium.
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