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65 Cards in this Set
- Front
- Back
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If the cost of textbooks rises by a large amount, you have incentive to
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buy fewer books and share with friends.
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Ceteris Paribus means
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others being equal
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Economists make progress by
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building and testing economic models
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As Judy moves down along her budget line
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her income and relative prices of goods and services do not change (moving along the budget line means they are still on the budget line)
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Any combination along an indifference curves that is farther from the origin
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is preferred to any combination along an indifference curve that is closer to the origin
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Well behaved indifference curves
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do not intersect
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As a producer moves along a convex isoquant curve and increases the use of the x-axis, the producer gives up on
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less and less of the input on the y-axis to use an additional unit of the input on the x-axis.
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IF firm A has $1000 to afford its weekly costs, using quantity of capital and labor, where POC= 1 and POL is 2, the isocost line is (assuming all budget is spent)
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Qk= 1000-2Ql
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If 2 consumption points are not on the same indifference curve, then one point is
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preferred to the other
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Production function of a firm is such that increase in all factor input entails a less than proportional increase in output. This production function has
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decreasing returns to scale.
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Utility
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defined as the satisfaction an agent derives from consuming a good
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Total Utility
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The satisfaction an agent derives from consuming a basket of goods
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Marginal Utility
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the variation in utility derived from the consumption of an extra unity of the good.
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Law of Diminishing Marginal Utility
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Marginal utility is decreasing with consumption
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Monotonicity
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extra units of a good always increases utility, so consumers prefer to have more of a good. Indifference curves farther from the origin correspond to higher levels of utility.
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Convexity
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combination of two extreme bundles x and y is always preferred to x and y.
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What are the characteristics of a basket of goods that maximizes the utility of the consumer?
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the MRS between the two goods is equal to the price ratio between two goods, (slope of indifference curve is equal to the slope of the budget constraint for the optimal basket).
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5 Requirements that a market meets to be defined as perfectly competitive.
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1. Large number of producers
2. Homogenous products 3. Free entry/exit from market 4. Perfect information 5. Perfect mobility of inputs. |
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Atomicity
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Many producers and consumers and none of them is large enough to individually influence the market outcome
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Homogenous products
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On any given market, the god is exactly the same regardless of who produced it, (no brand loyalty)
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Free entry and exit from the market
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agents are free to enter and exit markets in response to changing market conditions. No barriers to entry or exit
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Perfect information
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agents are constantly informed, without delay of the changing market conditions, all agents also have the same information about all the characteristics of the goods
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Perfect mobility of inputs
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All inputs can change markets freely
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Fixed Production cost
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independent of level of output produced
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Variable Production cost
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cost that depends on the level of output produced
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Average variable cost
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total variable cost divided by the level of output
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Marginal Cost
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increase in total cost brought on by the production of 1 extra unit of output
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Break even threshold
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mC=AC
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What conditions determine supply curve of the firm, assuming competitive market
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output for which marginal cost is equal to price level, p=mc
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profits
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total revenues minus total costs
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Generic budget constraint
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M= p1X1 + p2X2
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Optimal consumption point is given by
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the tangency between the budget constraint and the highest reachable indifference curve
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Income Effect
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The income effect is the part of the change in consumption following a change in the price of a good that is due to the change in real income caused by this change in price.
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Substitution effect
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The substitution effect is the part of the change in consumption following a change in the price of a good that is due to the change in relative prices caused by this change in price.
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The marginal rate of substation measures the number of units of a good that an agent is willing to exchange against a single unit of another good
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Keeping utility constant
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The cardinal theory of utility requires that the agent is able to
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measure the exact level of satisfaction brought by consuming a bundle
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if the income of an agent falls, this will
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shift the budget constraint to the left
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optimal bundle chosen by a rational consumer
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all the income is spent and the budget constraint is tangent to the indifference curve
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The Engels curve of a normal good is
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upwards-sloping
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the cross price elasticity between two goods gives us information
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on whether the goods are complements or substitutes
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If the inter temporal preferences are convex, then the agent will
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prefer to spend his consumption over his life time.
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if the marginal output of a firm is above its average output, then the average output is
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increasing
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In microeconomics, what are some principles about rational consumers?
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Rational people face tradeoffs.
Rational People think at the margin Rational people respond to incentives. THEY DO NOT TRY TO MINIMIZE OPPORTUNITY COST |
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Scarcity is a situation which
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wants exceed the resources able to satisfy them
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By remaining in school, you are paying an opportunity cost that includes
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the wages you could earn if you took a job
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Making a decision at the margin means
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deciding to do a little bit more or a little bit less of an activity.
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the supply curve of a competitive firm is given by
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the marginal cost curve of the firm
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The supple curve of a competitive firm is given by
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the marginal cost curve of the firm, but only above the average variable cost
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In a perfectly competitive market,
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consumer and producer surplus is maximized
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in a monopoly the marginal revenue curve is
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downward sloping
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in the long run, a monopoly manages to keep supernormal profits, this is because
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there are barriers to entry, preventing competitors from entering
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In the Cournot model of oligopolies, the two firms simultaneously choose
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the quantities they want to produce
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What assumption of perfect competition is not satisfied in models of monopolistic competition
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homogenous products
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Nash’s contribution to game theory was to show
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that a game has at least one Nash equilibrium, whether in pure or mixed strategies.
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in the prisoner’s dilemma, the desirable result (both players freed) cannot be reached as it is not a Nash equilibrium. This can be a change if
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the game is repeated an indefinite number of times.
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If the Gini coefficient for the distribution of income shifts from .4 to .45,
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income inequality has increased
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What is an example of a progressive tax?
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Income tax
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What are characteristics of public goods?
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Non-rivalry, and non-exclludability
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A good that carries a positive externality will be
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underproduced in a free market.
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1st Theory of Welfare
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All competitive market equilibria are Pareto-efficient. Markets provide the most effective mechanism of allocating goods, because markets lead to an efficient situation on their own. Doesn’t mean fairness or equality.
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2nd Theory of Welfare
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If preferences are conex, there is always a set of prices such that each Pareto-efficient equilibrium is a mart equilibrium for appropriate initial endowments.
There is a role for government in redistribution of endowments in order to achieve a given level of fairness. |
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Moral Hazard
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terms of agreement change nice a contract is signed, leading to a sub-optimal outcome
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Adverse selection
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relates the problem of observing the quality of the good/service sold before the truncation. seller assumed to have more information than buyer, leading to market power.
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Indifference curve
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graphical representation of different levels of utility, bundles on higher curves will be pre erred to ones on lower curves (as long as preferences are transitive)and must be monotonic (non-satiated, more preferred to less) and convex (combination of extreme bundles preferred to less extreme bundles)
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Marginal Rate of Substitution
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slope of the indifference curve, denotes the denotes the unit of good B that the agent is willing to give up in order to increase its consumption of good a by one unit keeping utility constant
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