Micro 2 (Chapter 11-20)

Front 1

Monopolist

Back 1

Firm that is the only producer of a good that has no close substitutes.

Front 2

Market power

Back 2

Ability of a firm to raise price.

Front 3

Network externality

Back 3

Exists when the value of a good or service to an individual is greater when many other people use the good or service as well.

Front 4

Tacit collusion

Back 4

When firms limit production and raise prices in a way that raises one anothers’ profits, even though they have not made any formal agreement, they are engaged in tacit collusion.

Front 5

Monopolistic competition

Back 5

Market structure in which there are many competing producers in an industry, each producer sells a differentiated product, and there is free entry into and exit from the industry in the long run.

Front 6

Zero-profit equilibrium

Back 6

In the long run, a monopolistically competitive industry ends up in zero-profit equilibrium: each firm makes zero profit at its profit-maximizing quantity.

Front 7

Excess capacity

Back 7

When firms in a monopolistically competitive industry produce less than the output at which average total cost is minimized, they have excess capacity.

Front 8

Externalities

Back 8

Arise when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect. (External costs and benefits)

Front 9

Negative externality

Back 9

If the impact on the bystander is adverse.

Front 10

Positive externality

Back 10

If it isbeneficial for the bystander.

Front 11

“Internalizing” Externalities

Back 11

When individuals take external costs or benefitsinto account.

Front 12

Pigovian taxes

Back 12

Taxes designed to reduce external costs

Front 13

Case Theorem

Back 13

Even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs—the costs to individuals of making a deal—are sufficiently low.

Front 14

Excludability

Back 14

A good is excludable if the supplier of that good can prevent people who do not pay from consuming it.

Front 15

Rivalry in consumption

Back 15

A good is rival in consumption if the same unit of the good cannot be consumed by more than one person at the same time.

Front 16

Private good

Back 16

A good that is both excludable and rival in consumption.

Front 17

Nonexcludability

Back 17

When a good is nonexcludable, the supplier cannot prevent consumption by people who do not pay for it.

Front 18

Non-rivalry in consumption

Back 18

A good is nonrival in consumption if more than one person can consume the same unit of the good at the same time.

Front 19

Public good

Back 19

One's person does not reduce another person's consumption. (Non-rival and non-excludable.)

Front 20

Free-Rider Problem

Back 20

Goods that are nonexcludablesuffer from the free - rider problem:many individuals are unwilling to pay for their own consumption and insteadwill take a “free ride” on anyone who does pay.

Front 21

Common resource

Back 21

Nonexcludable and rival in consumption: you can’t stop me from consuming the good, and more consumption by me means less of the good available for you.

Front 22

Artificially scarce goods

Back 22

Exludable, but nonrival in consumption /e.g. e-books, films).

Front 23

Public choice theory

Back 23

Study of agents and their interactions in the social system (under rules).

Front 24

Public choice analysis

Back 24

Normative purpose (what ought to be) to identify a problem, suggest how system could be improved.

Front 25

Efficient Market Hypothesis

Back 25

perfect rationality, perfect information, perfect time

Front 26

Incentive alignment

Back 26

Incentives should be directly aligned to the entity that bears all costs or enjoys all benefits.

Front 27

Principle Agent Problem (aka agency dilemma or theory of agency)

Back 27

Occurs when person or entity (agent) is able to make decision on behalf of / that impact another person or entity (principal).

Arises when two parties have different interest and asymmetric information. (agent has more)

Front 28

Non-scalable work

Back 28

Income is subject to limitations of you labor. (paid per hour)

Front 29

Scalable work

Back 29

Not paid for hour; income not subject to the limitations of your labor.

Front 30

Rent-seeking

Back 30

Attempt to obtain economic rent through a deployment in the political, social or environmental landscape in which the economic activities seek to occur.

Front 31

Welfare state

Back 31

Collection of government programs designed to alleviate economic hardship.

Front 32

Government transfer

Back 32

Government payment to an individual or a family.

Front 33

Poverty program

Back 33

Government program designed to aid the poor.

Front 34

Social insurance program

Back 34

Government program designed to provide protection against unpredictable financial distress.

Front 35

The Logic of the Welfare State

Back 35

Alleviating income inequality

Alleviating economic insecurity

Reducing poverty and providing access to health care

Front 36

Poverty threshold

Back 36

Annual income below which a family is officially considered poor.

Front 37

Poverty rate

Back 37

Percentage of the population with incomes below the poverty threshold.

Front 38

Mean household income

Back 38

Average income across all households.

Front 39

Median household income

Back 39

Income of the household lying at the exact middle of the income distribution.

Front 40

The Gini coefficient

Back 40

Number that summarizes a country’s level of income inequality based on how unequally income is distributed across quintiles.

Front 41

Means-tested program

Back 41

Program available only to individuals or families whose incomes fall below a certain level.

Front 42

In-kind benefit (transfers)

Back 42

Benefit given in the form of goods or services.

+ prevent misuse of income

- inefficient, disrespectful

Front 43

Negative income tax

Back 43

Program that supplements the income of low-income working families. (only for workers who earn income)

Front 44

Private health insurance

Back 44

Each member of a large pool of individuals pays a fixed amount annually to a private company that agrees to pay most of the medical expenses of the pool's members. (regulated)

Front 45

Single-payer system

Back 45

Health care system in which the government is the principal payer of medical bills funded through taxes. (regulated)

Front 46

Fee-for-service (FFS)

Back 46

Payment model where services are unbundled and paid for separately. Payment is dependent on quantity of care. Health providers are paid for what they do, not for what they accomplish.

Front 47

Physical capital (capital)

Back 47

Consists of manufactured productive resources such as equipment, buildings, tools, and machines.

Front 48

Human capital

Back 48

Improvement in labor created by education and knowledge that is embodied in the workforce.

Front 49

Factor distribution of income

Back 49

Division of total income among labor, land, and capital.

Front 50

Marginal product of labor MPL

Back 50

Quantity/ Labor ; goes down, the more you produce

Front 51

Value of the marginal product of a factor

Back 51

Value of the additional output generated by employing one more unit of that factor.

Front 52

Shifts of the factor demand curve

Back 52

1. Changes in the price of goods: demand for factor rises/falls as demand for ultimate output rises/ falls

2. Changes in supply of other factors: changes in one factor can have an effect on the productivity of another, changing its marginal product and its price

3. Changes in technology: increase/ reduce demand for a factor

Front 53

Value of the marginal product curve of a factor (VMPL)

Back 53

Shows how the value of the marginal product of that factor depends on the quantity of the factor employed. -> Producer's individual demand curve for that factor

Front 54

Rental Rate (of either land or capital)

Back 54

Cost, explicit or implicit, of using a unit of that asset for a given period of time.

Front 55

Marginal productivity theory of income distribution

Back 55

Each factor of production is paid the value of the marginal product of the last unit of that factor employed in the factor market as a whole. (equilibrium value of MPL)

Front 56

Compensating differentials

Back 56

Wage differences across jobs that reflect the fact that some jobs are less pleasant than others.

Front 57

Efficiency - wage model

Back 57

Some employers pay an above - equilibrium wage as an incentive for better performance.

Front 58

Individual labor supply curve

Back 58

Shows how the quantity of labor supplied by an individual depends on that individual’s wage rate.

Front 59

Time allocation budget line

Back 59

Shows an individual’s trade-off between consumption of leisure and the income that allows consumption of marketed goods.

Front 60

Optimal time allocation rule

Back 60

An individual should allocate time so that the marginal utility gained from the income earned from an additional hour worked is equal to the marginal utility of an additional hour of leisure.

Front 61

Random variable

Back 61

Variable with an uncertain future value.

Front 62

Expected value of a random variable

Back 62

Weighted average of all possible values, where the weights on each possible value correspond to the probability of that value occurring.

Front 63

State of the world

Back 63

Possible future event.

Front 64

Financial risk

Back 64

Uncertainty about monetary outcome.

Front 65

Risk

Back 65

Uncertainty about future outcomes.

Front 66

Expected utility

Back 66

Expected value of an individual’s total utility given uncertainty about future outcomes.

Front 67

Expected Wealth

Back 67

Money value of what a person expects to own at a given point of time (aka expected utility).

EW= Up*P + Up*P

Up- Potential Utility

P- Probability of Realization of Utility

Front 68

Premium

Back 68

Payment to an insurance company in return for the insurance company’s promise to pay a claim in certain states of the world.

Front 69

Fair insurance policy

Back 69

Insurance policy for which the premium is equal to the expected value of the claim.

Front 70

Risk Aversion

Back 70

Dislike of risk. Measures the inherent cost of utility that bearing risk itself entails.-> Measuring compensation needed to make a given amount of risk acceptable.

Differences in Risk Aversion through differences in preferences and income/wealth. -> affect how much an individual is willing to pay to avoid risk

Front 71

Risk - averse individuals

Back 71

Individuals choosing to reduce the risk they face when that reduction leaves the expected value of their income or wealth unchanged.

Front 72

Efficient allocation of risk

Back 72

Allocation of risk in which those who are most willing to bear risk are those who end up bearing it.

Front 73

Utility of Wealth/ Loss Aversion

Back 73

Each additional euro of wealth brings diminishing marginal utility. ->Pain from a loss is greater than the pleasure from a gain.

Front 74

Making a choice with uncertainty

Back 74

Faced with uncertainty, a person chooses the action that maximizes expected utility:

1. Calculate expected utility from risky investment

2. Calculate expected utility from risk-free investment

3. Compare the two expected utilities

Front 75

Demand for insurance

Back 75

As the premium falls, more persons who are less risk-averse are induced to demand policies, increasing the quantity of policies demanded.

Front 76

Supply of insurance

Back 76

As the premium increases, investors who are more risk-averse are induced to supply policies to the market, increasing the quantity of policies supplied.

Front 77

Pooling

Back 77

Strong form of diversification in which an investor takes a small share of the risk in many independent events. This produces a payoff with very little total overall risk.

Front 78

Adverse selection

Back 78

Occurs when an individual knows more about the way things are than other people do. Private information leads to an advantage for this person.

Front 79

Screening

Back 79

Adverse selection can be reduced through screening: using observable information about people to make inferences about their private information.

Front 80

Signaling

Back 80

Adverse selection can be diminished by people signaling their private information through actions that credibly reveal what they know.

Front 81

Moral hazard

Back 81

Occurs when an individual knows more about his or her own actions than other people do (private information). This leads to a distortion of incentives to take care or to exert effort when someone else bears the costs of the lack of care or effort.

Front 82

Discrimination

Back 82

Refers to actions. Distinguishing treatment of an individual based on his membership to a certain group/ category.

e.g. women and minorities earn less than similar men

Front 83

Discrimination doesn't matter

Back 83

Human capital: benefits of education distributed unequally; knowledge/ experience may be limited

Compensating differentials: woman are more likely to interrupt career to raise children

Discrimination is costly: firms that care about discrimination face a competitive disadvantage

Front 84

Discrimination matters

Back 84

Human capital: education is distributed unequally due to discrimination

Compensating differentials: even woman who do not raise children suffer a wage differential

Discrimination is costly: costs are hard to quantify; governments/ clients may male discrimination advantageous