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24 Cards in this Set
- Front
- Back
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3 Assumptions of Economist |
1. people are rational 2. people respond to economic incentives 3. optimal decisions are made at the margin |
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The Economic Problem |
1. What goods and services will be produced. 2. How will these goods be produced. 3. Who will receive these goods and services. |
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Productive Efficiency |
Goods and services are produced at the lowest possible cost. |
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Allocative Efficiency |
production is consistent with consumer preferences. Every goods and service is produced until up to the point where the MC=MB. |
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4 Assumptions about consumer preferences |
1. Preferences are complete. 2. Preferences are transitive. 3. More is better than less. 4. Convexity (diminishing MRS) |
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Why do indifference curves slope downward from left to right? |
The assumption more is better than less. |
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An upward sloping indifference curve violates which law? |
More is better than less. |
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Indifference curves crossing violates which law? |
More is better than less. |
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definition of MRS(x,y) |
How much Y (vertical axis) consumer is willing to give up for additional unit of X (horizontal axis). MRS(x,y)= - (change in Y / change in X) or MRS(x,y)= MUx/MUy |
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The MRS(x,y) of a concave indifference curve is |
Increasing. |
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MRS(x,y) of convex indifference curve is |
decreasing. |
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Utility Function of Cobb Douglas |
u(x,y) = (X^a)(Y^b) |
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Utility Function of Perfect Substitutes |
u(x,y) = aX + bY |
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Utility Function of Perfect Compliments |
u(x,y) = min(aX, bY) aX=bY |
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Budget line |
Pf*F + Pc*C = I |
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How do change in price and change in income affect the slope of the graph. |
Income change shifts budget line to the left or right, and price change only changes the slope. |
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Price Consumption Curve |
Curve tracing the utility-maximizing combinations of two goods. Tells us the relationship between goods. |
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Individual Demand Curve |
Curve relating the the quantity of a good that a consumer will buy to its price. |
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Properties of Individual demand curve. |
1. At every point on a demand curve is an optimal bundle that satifies MRS(f,c)=Pf/Pc. 2. MRS(f,c) gets smaller as we move along demand curve. 3. Utility level changes as we move along a demand curve. |
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Income consumption curve |
curve tracing the utility-maximizing combinations of two goods as consumer's income changes. Tells us whether good is normal, inferior, or giffen. |
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Substitution effect |
change in quantity demanded caused by the change in relative prices, holding utility constant. Change in slope of budget line while staying on the original indifference curve. Always negative. |
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Income effect |
The change in quantity demanded caused by a change in the purchasing power. Shift in budget line. |
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When income is effect is greater than substitution effect, good is a |
Giffen good. |
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When substitution effect is greater than income effect the good is an |
Inferior good. |
