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57 Cards in this Set
- Front
- Back
utility
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the pleasure or satisfaction people get from doing or consuming something
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total utility
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the total satisfaction one gets from consuming a product
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marginal utility
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refers to the satisfaction one gets from consuming one additional unit of product above and beyond what one has consumed up to that point
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principle of diminishing marginal utility
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as you consume more of a good, the marginal utility received from each additional unit of the good decreases with each additional unit consumed
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analysis of rational choice
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analysis of how individuals choose goods within their budget in order to maximize total utility
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principle of rational choice
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spend your money on those goods that give you the most marginal utility (MU) per (divided by) dollar (price)
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you should keep adjusting or spending within your budget if the marginal utility per dollar of the two goods
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differs
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utility maximizing rule
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when the ratios of the marginal utility to price of the two goods are equal
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when price of a good goes up
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marginal utility per dollar goes down
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income effect
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the reduction in quantity demanded because we're poorer
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substitution effect
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the reduction in quantity demanded because relative price has risen
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when relative price goes up
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quantity purchased decreases even if you're given money to compensate you for the rise
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bounded rationality
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rationality based on rules of thumb rather than rational choice
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rule of thumbs
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you get what you pay for, follow the leader, focal point (through luck or advertising a product has become focal points to which people have gravitated)
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conspicuous consumption
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consumption of goods not for one's direct pleasure but simply to show off to others
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ultimatum game
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the first person only gets the money if the other person accepts the offer. if the second person does not accept they both get nothing. means people have a sense of fairness
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status quo bias
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individual's actions are very much influenced by the current situation, even when that reasonably does not seem to be very important to the decision
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game theory
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formal economic reasoning applied to situations in which decisions are inter dependent
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screening questions
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a question structured in a way to reveal strategic information about the person who answers
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prisoner's dilemma
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well known two person game that demonstrates the difficultly of cooperative behavior in certain circumstances
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pay off matrix
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table that show the outcome of every choice by every player given the possible choices of all other players
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non cooperative game
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game in which each player is out for himself and agreements are either not possible or not enforceable
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cheap talk
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communication that occurs before the game is played that carries no cost and is backed up only b trust and not any enforceable agreement. cheap talk does not influence the results
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informal game theory
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often called behavioral game theory because it relies of empirical observation not deductive logic alone to determine the likely choices of individuals
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vickrey auction
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sealed bid auction where the highest bidder wins but pays the price bid by the next highest bidder
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framing effects
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tendency of people to base their choices on how a choice is presented
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production
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transformation of factors into goods and services
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firm
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an economic institution that transforms factors of production into goods and services
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virtual firms
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do not produce anything, they simply subcontract out all production
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firms maximize
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profit
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profit=
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total revenue -total cost (P * Q -- TC)
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accounting profit
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explicit revenue less explicit cost
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implicit cost
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include the opportunity costs of factors of production provided by the owners of the business. economists include explicit and implicit costs and revenues
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total cost
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explicit payments to the factors of production plus the opportunity cost of the factors provided by the owners of the firm. TC= VC + FC
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total revenue
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amount a firm receives for selling its product or service plus any increase in the value of the assets owned by the firm. P * Q
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economic profit
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explicit and implicit revenue- explicit and implicit cost
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long run decision
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firm chooses among al possible production techniques
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short run decision
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firm is constrained in regard to what production decision it can make
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in the long run, __
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all inputs are variable
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in the short run, __
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some inputs are fixed
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production table
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table showing the output resulting from various combinations of factors of production or inputs
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marginal product
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the additional output that will be forthcoming from an additional worker, other inputs constant
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average product
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output per worker. output / number of workers
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production function
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relationship between the inputs (factors of production) and outputs. tells the maximum amount of output that can be derived from a given number of inputs
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law of diminishing marginal productivity
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as more and more of a variable in put is added to an existing fixed input, eventually the additional output one gets from that additional input is going to fall
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fixed costs
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costs that are spent and cannot be changed in the period of time under consideration. TC-VC=FC
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variable costs
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costs that change as output changes. TC-FC=VC
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total cost
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the sum of fixed and variable costs. VC+FC=TC
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total cost
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the sum of fixed and variable costs
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average total cost
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total cost divided by the quantity produced. not the same as total cost. sum of average fixed and variable cost. TC/ Q
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averaged fixed cost
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fixed cost divided by quantity produced. FC/ Q
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average variable cost
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variable cost divided by quantity produced. VC/ q
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marginal cost
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the increase/ decrease in total cost form increasing/decreasing level of output by one unit.
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when marginal cost exceeds average cost, __
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average cost must be rising
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when marginal cost is less than average cost,__
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average cost must be falling
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when marginal productivity is greater than average productivity,__
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then average productivity is rising and vice versa
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when marginal cost= average total cost and average variable costs, __
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average total cost and average variable cost are at the low point
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