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38 Cards in this Set
- Front
- Back
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Economies of scale |
The cost advantage that arises with increased output of a product. |
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Comparative advantage |
The ability of a firm/individual to produce goods/services at a lower opportunity cost than other firms/individuals. |
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Absolute advantage |
The ability of a firm/individual to produce a greater quantity of a good/service than its competitors, using the same amount of resources. |
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How to calculate opportunity cost? |
What I sacrifice / what I gain = opportunity cost |
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Normal good |
The demand for this good increases with increases in income (and decreases with decreased income). E.g., sports cars, fancy restaurant meals |
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Inferior good |
The demand for this good increases with decreased income, and vice versa. E.g., instant noodles |
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Substitutes |
Two goods for which an increase in price for good A leads to an increase in demand for good B. E.g., Emmental and Gouda, ice cream and frozen yoghurt |
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Complements |
Two goods for which increase in price for good A leads to an increase in the demand for good B. E.g., cars and petrol, hot dogs and hot dog buns |
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Law of demand |
When the price of a good goes up, demand goes down. |
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Demand curve |
A graph of the relationship between the price of a good and the quantity demanded |
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Shifts along the demand curve |
A change in price of the good itself creates a movement along the existing demand curve, up or down = More or fewer people buy the good because of a change in the good's price. |
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Shifts of the demand curve |
Prices of related goods, tastes, expectations, income, etc., shifts the entire curve to the left or right = The demand of the good changes even though the price stays the same. |
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Law of supply |
When the price of a good goes up, the quantity supplied of that good increases as well |
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Shifts along the supply curve |
A change in the price of the good creates a movement along the existing supply curve = More or less of the good produced because of a change in the good's price |
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Shifts of the supply curve |
A change in input prices, technology, expectations and number of sellers can move the entire supply curve to the left or right = Higher or lower quantity of the good is produced even though the price stays the same. |
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Law of supply and demand |
The unit price for a particular good will vary until it settles at a point where the quantity demanded (at the current price) will be the same as the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted. |
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Willingness to pay |
The maximum amount that any consumer is willing to pay for a certain good |
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Reservation demand price |
The maximum amount that any consumer is willing to pay for one unit of certain good |
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Reservation selling price |
The minimum amount a producer asks for to produce one unit of good x |
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Consumer surplus |
The amount a buyer is willing to pay for a good, minus the amount the buyer actually pays for it |
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Producer surplus |
The amount a seller gets for a good, minus the costs of producing that good |
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How to calculate total surplus? |
Value to buyers - Cost to sellers = total surplus |
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Efficiency |
The resource allocation which leads to maximization of total surplus |
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Externality (negative or positive) |
The uncompensated impact of one person’s actions on the bystander’s well-being / The cost or benefit that affects a third party who did not choose to incur that cost or benefit. |
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Internalising an externality |
Altering incentives so that people take into account of the external effects of their actions. E.g. through taxes or subsidising a good |
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Social optimum |
An equilibrium point where the price of a good includes the social costs (private + external costs). Includes the cost or benefit of an externality in the price. |
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Coase theorem |
If private parties can bargain without cost over the allocation of resources, they solve the problem of externalities on their own. Requires clearly defined property rights and low transaction costs. |
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Transaction cost |
The costs parties incur in the process of agreeing to and following through on a bargain |
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Corrective/Pigovian tax |
A tax designed to induce private decision makers to take into account the social costs that arise from a negative externality |
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Arrow's impossibility theorem |
There is not a single decision making rule for collective decision making that satisfies all the following: unanimity, transitivity, independence of irrelevant alternatives, and non-dictatorship |
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Median voter theorem |
If voters are choosing a point along a line and each voter wants the point closest to his most preferred point, then majority rule will pick the most preferred point of the median voter |
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Condorcet paradox |
The failure of majority rule to produce transitive preferences for society |
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Screening |
An action taken by an uninformed party to induce an informed party to reveal information (asking questions about the used car, selling specific car insurance to high-risk drivers) |
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Signaling |
An action taken by an informed party to reveal private information to an uninformed party (company adverts, worker’s CV, warranties) |
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Principal |
A person for whom another person, called the agent, is performing some act |
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Agent |
A person who is performing an act for another person, called the principal |
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Adverse selection |
The tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party (e.g., used cars market) |
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Moral hazard |
The tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behaviour (e.g., a worker tries to get away with less work when boss is not watching) |
