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90 Cards in this Set
- Front
- Back
Externality |
action by either a producer or a consumer which affects other producers or consumers but is not accounted for in the market price. |
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Marginal External Cost |
Increase in cost imposed externally as one or more firms increase output by one unit. |
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Marginal Social Cost |
Sum of the marginal cost of production and the marginal external cost. -Total cost to society =MC+MEC |
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Socially optimal quantity |
where P=MSC |
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Marginal External Benefit |
Increased benefit that accrues to tother parties as a firm increases output by one unit |
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Marginal Social Benefit |
Sum of the marginal private benefit plus the marginal external benefit. =MB+MEB |
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Emissions Standard |
legal limit on the amount of pollutants that a firm can emit. Ensures that the firm produces efficiently. Firms meet standards by installing pollution abatement equipment. Firms will only enter industry if price of product is greater than the average cost of production plus abatement |
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Emissions Fee |
Charge levied on each unit of a firms emissions. Firm will reduce emissions to the point at which the fee is equal to the marginal cost of abatement. |
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Efficient level of factory emissions |
level that equates the margianl external cost of emissions MEC to the benefit associated with lower abatement costs MCA. |
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Tradable Emissions permits |
system of marketable permits allocated among firms specifying the maximum level of emissions that can be generated. |
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In market equillibrium |
the price of a permit equals the marginal cost of abatement for all firms. |
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Common Property resources |
resource to which anyone has free access. -externalities arise when resources can be used without payment; likely to be over-utilized. |
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Common property resource use |
Used up to the point at which the private cost is equal to the additional revenue generated. |
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Expected Value |
the weighted average of the payoffs associated with all possible outcomes. |
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Greater variability= |
greater risk |
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Deviation |
difference between the expected payoff and the actual payoff. actual payoff-expected payoff |
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Value of complete information |
difference between the expected value of a choice when there is complete information and the expected value when information is incomplete. |
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Law of large numbers |
when insurance companies sell a large number of policies to face relatively little risk. |
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Rational |
you understand your preferences and know all of your costs, you reflect on these, and make choices that are maximizing. you have perfect information, are able to evaluate all your benefits and costs, and are consistent. |
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Self Interested |
You make decisions that maximize your own utility. |
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Behavioral Economics integrates |
Psychology and Neuroscience |
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Behavioral Economist assumption |
People are not always rational or self interested. |
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Weaknesses in standard economic theory |
People sometimes make choices that are difficult to reconcile with standard economic theory. Standard economic theory can lead to seemingly unreasonable conclusions about consumer welfare. |
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Standard economic theory ignores |
fairness or status possibility of mistakes in decision making |
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Advantages of experiments |
1. easier to establish causality 2. experimenter can manipulate one variable and leave everything else constant. 3. possible to obtain info that isnt available in the real world. |
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Disadvantages of experiments |
1. decisions made in the lab often differ from decisions made in the real world. 2. Introduce influences on decision making that are hard to measure or control. 3. people want to play the game correctly as opposed to how they would actually respond. 4. participants are inexperience at making economic decisions. |
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1st Departure: Incoherent Choices |
Traditional economics assumes that choices reflect preferences Behavioral economics observe that people do not make decisions that are consistent with their stated preferences. Ex: Sometimes we can't rank our preferences. Ex: Choices are influenced by anchoring |
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Anchoring |
occurs when someones choices are linked to prominent but irrelevant information. |
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2nd Departure: Bias toward the status quo |
Traditional economics assumes that people will always be willing to change their choice to increase their utility. Behavioral economists observe that change is really hard and we resist it. More choices are not necessarily better because we tend to freeze up and not make a choice. Ex: Endowment effect and default effect |
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Endowment effect |
peoples tendency to value something more highly when they own it than when they dont. |
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Default effect |
when confronted with many alternatives, people sometimes avoid making a choice and end up with the option that is assigned as a default. |
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3rd Departure: narrow framing |
Traditional economists assume that we recognize that things like money are fungible meaning that $10 in your pocket is no different than if you had $10 in your savings account. Behavioral economists observe that we do not treat our money as fungible and instead have mental categories for our money. |
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4th Departure: Salience |
Traditional economics assumes that the presentation of choices or information should not matter. Behavioral economists observe that how choices are worded or the order of information will impact and change our choice. Ex: Disease survey |
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5th departure: Rules of Thumb |
Traditional economics assumes that each consumer rationally weighs costs and benefits to identify the utility maximizing choice. Behavioral economists observe that we are kind of lazy and we use mental shortcuts to make decisions. |
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Dynamically consistent |
our preferences over alternatives at some future date do not change as the date approaches. we follow through on our plans and intentions we never lose self control |
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Dynamically inconsistent |
Our preferences change as time horizons change we sometimes dont follow through on plans and intentions we totally use self control |
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1st departure: present bias |
form of dynamic inconsistency involving bias towards immediate gratification a person with a present bias often suffers from lapses of self control. Ex: make plans to exercise tomorrow but when tomorrow comes you stay home instead |
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pre commitment |
a choice that removes future options. locks you into a particular decision. Ex: make plans to meet your friend at the gym |
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2nd departure: projection bias |
form of dynamic inconsistency involving the tendency to evaluate future tastes and needs on the tastes and needs at the moment of the decision making. idea that your current mood matters when you make decisions about what you may want and need in the future. Ex: dont grocery shop when you're hungry. |
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Supply curve shows |
the quantity of output that producers are willing to produce and sell at each possible market price. |
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indifference map |
a graph containing a set of indifference curves showing the market baskets that the consumer is indifferent between. |
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Location of maximizing basket |
at the tangency point between the budget line and the indifference curve |
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inferior good |
good for which demand decreases when income increases and demand increases when income decreases. |
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normal good |
increase in income causes an increase in quantity demanded |
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engel curve |
curve relating the quantity of a good consumed to income |
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market demand |
sum of the demands of all the buyers in a market |
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price elasticity of demand |
a measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on a buyers plans remain unchanged Inelastic= Ep < 1 Elastic= Ep > 1 |
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production function |
shows the highest level of output a firm can produce from each combination of inputs. |
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short run |
period of time in which one or more production factors are fixed |
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long run |
amount of time needed to make all production factors variable. |
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Returns to scale |
refers to the rate at which output increases as inputs are increasing proportionately |
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increasing returns to scale |
output more than doubles when inputs are doubled. |
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constant returns to scale |
output exactly doubles when all inputs are doubled |
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decreasing returns to scale |
output less than doubles when all inputs are doubled. |
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marginal rate of technical substitution |
tells us how easily a firm can substitute one input for another. |
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rental rate of capital |
cost per of renting one unit of capital
should be equal to the user cost of capital |
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total cost |
cost of labor + cost of capital |
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Fundamental problem all firms face |
how to choose inputs to produce at the lowest cost. |
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user cost of capital |
economic depreciation + (Interest rate)(value of capital) |
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Long run average cost curve |
a curve that relates the average cost of production to output when all inputs are variable. |
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economies of scale |
double output but less than double their cost |
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Diseconomies of scale |
double output with more than doubled costs |
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degree of economies of scope |
percentage of cost savings resulting from producing two or more products jointly |
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3 assumptions of competitive markets |
1. price taking 2. product homogeneity 3. free entry and exit |
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price taking |
decisions of one firm have no impact on market price. Because each firm is small compared to overall market. |
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Product Homogeneity |
the products of all firms in a market are perfectly substitutable with one another |
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free entry and exit |
there are no special costs that make it difficult for a new firm to enter or exit an industry. |
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marginal revenue |
the change in revenue resulting from a one unit increase in output |
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marginal cost |
additional cost of producing one additional unit of output |
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when are profits maximized? |
MR=MC |
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When should the firm shut down? |
- if AVC>P - if AVC |
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price elasticity of market supply |
measures the sensitivity of industry output to market price |
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market supply curve |
horizontal sum of the quantities supplied by all individual firms |
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perfectly inelastic short run supply |
arises when industry's plant and equipment are fully utilized and new plants must be built to increase output |
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which costs declines as output increases? |
average fixed cost
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isoquant |
curve that shows all the combinations of inputs that yield the same total output |
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demand curve for perfectly competitive firm |
perfectly horizontal |
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in the long run PC firms will earn |
zero economic profit because of price taking |
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effect of a tax |
the firm will reduce its output to the point at which the marginal cost plus the tax is equal to the price of the product reducing output from q1 to q2 |
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Total consumer surplus |
sum of all individual consumer surplus |
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consumer surplus |
difference between what you're willing to pay and what it actually costs. area under demand but above price |
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producer surplus |
area above the marginal cost curve but below the price |
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profit |
total revenue-total cost |
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total surplus |
CS+PS+ gov tax revenue (if applicable) |
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deadweight loss |
net loss of total surplus |
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market failure |
a situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumer and producers. |
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shortage |
happens when maximum price ceiling is set below price equilibrium. |
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surplus |
when maximum price is greater than the equillibrium ex of price floor: minimum wage |
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import quotas |
limit on the quantity of a good that can be imported into their country |
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tariffs |
tax placed on the imported good |