Econ 306 Final

Front 1

Externality

Back 1

action by either a producer or a consumer which affects other producers or consumers but is not accounted for in the market price.

Front 2

Marginal External Cost

Back 2

Increase in cost imposed externally as one or more firms increase output by one unit.

Front 3

Marginal Social Cost

Back 3

Sum of the marginal cost of production and the marginal external cost.

-Total cost to society

=MC+MEC

Front 4

Socially optimal quantity

Back 4

where P=MSC

Front 5

Marginal External Benefit

Back 5

Increased benefit that accrues to tother parties as a firm increases output by one unit

Front 6

Marginal Social Benefit

Back 6

Sum of the marginal private benefit plus the marginal external benefit.

=MB+MEB

Front 7

Emissions Standard

Back 7

legal limit on the amount of pollutants that a firm can emit. Ensures that the firm produces efficiently. Firms meet standards by installing pollution abatement equipment. Firms will only enter industry if price of product is greater than the average cost of production plus abatement

Front 8

Emissions Fee

Back 8

Charge levied on each unit of a firms emissions. Firm will reduce emissions to the point at which the fee is equal to the marginal cost of abatement.

Front 9

Efficient level of factory emissions

Back 9

level that equates the margianl external cost of emissions MEC to the benefit associated with lower abatement costs MCA.

Front 10

Tradable Emissions permits

Back 10

system of marketable permits allocated among firms specifying the maximum level of emissions that can be generated.

Front 11

In market equillibrium

Back 11

the price of a permit equals the marginal cost of abatement for all firms.

Front 12

Common Property resources

Back 12

resource to which anyone has free access.

-externalities arise when resources can be used without payment; likely to be over-utilized.

Front 13

Common property resource use

Back 13

Used up to the point at which the private cost is equal to the additional revenue generated.

Front 14

Expected Value

Back 14

the weighted average of the payoffs associated with all possible outcomes.

Front 15

Greater variability=

Back 15

greater risk

Front 16

Deviation

Back 16

difference between the expected payoff and the actual payoff.

actual payoff-expected payoff

Front 17

Value of complete information

Back 17

difference between the expected value of a choice when there is complete information and the expected value when information is incomplete.

Front 18

Law of large numbers

Back 18

when insurance companies sell a large number of policies to face relatively little risk.

Front 19

Rational

Back 19

you understand your preferences and know all of your costs, you reflect on these, and make choices that are maximizing. you have perfect information, are able to evaluate all your benefits and costs, and are consistent.

Front 20

Self Interested

Back 20

You make decisions that maximize your own utility.

Front 21

Behavioral Economics integrates

Back 21

Psychology and Neuroscience

Front 22

Behavioral Economist assumption

Back 22

People are not always rational or self interested.

Front 23

Weaknesses in standard economic theory

Back 23

People sometimes make choices that are difficult to reconcile with standard economic theory.

Standard economic theory can lead to seemingly unreasonable conclusions about consumer welfare.

Front 24

Standard economic theory ignores

Back 24

fairness or status

possibility of mistakes in decision making

Front 25

Advantages of experiments

Back 25

1. easier to establish causality

2. experimenter can manipulate one variable and leave everything else constant.

3. possible to obtain info that isnt available in the real world.

Front 26

Disadvantages of experiments

Back 26

1. decisions made in the lab often differ from decisions made in the real world.

2. Introduce influences on decision making that are hard to measure or control.

3. people want to play the game correctly as opposed to how they would actually respond.

4. participants are inexperience at making economic decisions.

Front 27

1st Departure: Incoherent Choices

Back 27

Traditional economics assumes that choices reflect preferences

Behavioral economics observe that people do not make decisions that are consistent with their stated preferences.

Ex: Sometimes we can't rank our preferences.

Ex: Choices are influenced by anchoring

Front 28

Anchoring

Back 28

occurs when someones choices are linked to prominent but irrelevant information.

Front 29

2nd Departure: Bias toward the status quo

Back 29

Traditional economics assumes that people will always be willing to change their choice to increase their utility.

Behavioral economists observe that change is really hard and we resist it. More choices are not necessarily better because we tend to freeze up and not make a choice.

Ex: Endowment effect and default effect

Front 30

Endowment effect

Back 30

peoples tendency to value something more highly when they own it than when they dont.

Front 31

Default effect

Back 31

when confronted with many alternatives, people sometimes avoid making a choice and end up with the option that is assigned as a default.

Front 32

3rd Departure: narrow framing

Back 32

Traditional economists assume that we recognize that things like money are fungible meaning that $10 in your pocket is no different than if you had $10 in your savings account.

Behavioral economists observe that we do not treat our money as fungible and instead have mental categories for our money.

Front 33

4th Departure: Salience

Back 33

Traditional economics assumes that the presentation of choices or information should not matter.

Behavioral economists observe that how choices are worded or the order of information will impact and change our choice.

Ex: Disease survey

Front 34

5th departure: Rules of Thumb

Back 34

Traditional economics assumes that each consumer rationally weighs costs and benefits to identify the utility maximizing choice.

Behavioral economists observe that we are kind of lazy and we use mental shortcuts to make decisions.

Front 35

Dynamically consistent

Back 35

our preferences over alternatives at some future date do not change as the date approaches.

we follow through on our plans and intentions

we never lose self control

Front 36

Dynamically inconsistent

Back 36

Our preferences change as time horizons change

we sometimes dont follow through on plans and intentions

we totally use self control

Front 37

1st departure: present bias

Back 37

form of dynamic inconsistency involving bias towards immediate gratification

a person with a present bias often suffers from lapses of self control.

Ex: make plans to exercise tomorrow but when tomorrow comes you stay home instead

Front 38

pre commitment

Back 38

a choice that removes future options. locks you into a particular decision.

Ex: make plans to meet your friend at the gym

Front 39

2nd departure: projection bias

Back 39

form of dynamic inconsistency involving the tendency to evaluate future tastes and needs on the tastes and needs at the moment of the decision making.

idea that your current mood matters when you make decisions about what you may want and need in the future.

Ex: dont grocery shop when you're hungry.

Front 40

Supply curve shows

Back 40

the quantity of output that producers are willing to produce and sell at each possible market price.

Front 41

indifference map

Back 41

a graph containing a set of indifference curves showing the market baskets that the consumer is indifferent between.

Front 42

Location of maximizing basket

Back 42

at the tangency point between the budget line and the indifference curve

Front 43

inferior good

Back 43

good for which demand decreases when income increases and demand increases when income decreases.

Front 44

normal good

Back 44

increase in income causes an increase in quantity demanded

Front 45

engel curve

Back 45

curve relating the quantity of a good consumed to income

Front 46

market demand

Back 46

sum of the demands of all the buyers in a market

Front 47

price elasticity of demand

Back 47

a measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on a buyers plans remain unchanged

Inelastic= Ep < 1

Elastic= Ep > 1

Front 48

production function

Back 48

shows the highest level of output a firm can produce from each combination of inputs.

Front 49

short run

Back 49

period of time in which one or more production factors are fixed

Front 50

long run

Back 50

amount of time needed to make all production factors variable.

Front 51

Returns to scale

Back 51

refers to the rate at which output increases as inputs are increasing proportionately

Front 52

increasing returns to scale

Back 52

output more than doubles when inputs are doubled.

Front 53

constant returns to scale

Back 53

output exactly doubles when all inputs are doubled

Front 54

decreasing returns to scale

Back 54

output less than doubles when all inputs are doubled.

Front 55

marginal rate of technical substitution

Back 55

tells us how easily a firm can substitute one input for another.

Front 56

rental rate of capital

Back 56

cost per of renting one unit of capital

should be equal to the user cost of capital

Front 57

total cost

Back 57

cost of labor + cost of capital

Front 58

Fundamental problem all firms face

Back 58

how to choose inputs to produce at the lowest cost.

Front 59

user cost of capital

Back 59

economic depreciation + (Interest rate)(value of capital)

Front 60

Long run average cost curve

Back 60

a curve that relates the average cost of production to output when all inputs are variable.

Front 61

economies of scale

Back 61

double output but less than double their cost

Front 62

Diseconomies of scale

Back 62

double output with more than doubled costs

Front 63

degree of economies of scope

Back 63

percentage of cost savings resulting from producing two or more products jointly

Front 64

3 assumptions of competitive markets

Back 64

1. price taking

2. product homogeneity

3. free entry and exit

Front 65

price taking

Back 65

decisions of one firm have no impact on market price. Because each firm is small compared to overall market.

Front 66

Product Homogeneity

Back 66

the products of all firms in a market are perfectly substitutable with one another

Front 67

free entry and exit

Back 67

there are no special costs that make it difficult for a new firm to enter or exit an industry.

Front 68

marginal revenue

Back 68

the change in revenue resulting from a one unit increase in output

Front 69

marginal cost

Back 69

additional cost of producing one additional unit of output

Front 70

when are profits maximized?

Back 70

MR=MC

Front 71

When should the firm shut down?

Back 71

- if AVC>P

- if AVC

Front 72

price elasticity of market supply

Back 72

measures the sensitivity of industry output to market price

Front 73

market supply curve

Back 73

horizontal sum of the quantities supplied by all individual firms

Front 74

perfectly inelastic short run supply

Back 74

arises when industry's plant and equipment are fully utilized and new plants must be built to increase output

Front 75

which costs declines as output increases?

Back 75

average fixed cost

Front 76

isoquant

Back 76

curve that shows all the combinations of inputs that yield the same total output

Front 77

demand curve for perfectly competitive firm

Back 77

perfectly horizontal

Front 78

in the long run PC firms will earn

Back 78

zero economic profit because of price taking

Front 79

effect of a tax

Back 79

the firm will reduce its output to the point at which the marginal cost plus the tax is equal to the price of the product reducing output from q1 to q2

Front 80

Total consumer surplus

Back 80

sum of all individual consumer surplus

Front 81

consumer surplus

Back 81

difference between what you're willing to pay and what it actually costs.

area under demand but above price

Front 82

producer surplus

Back 82

area above the marginal cost curve but below the price

Front 83

profit

Back 83

total revenue-total cost

Front 84

total surplus

Back 84

CS+PS+ gov tax revenue (if applicable)

Front 85

deadweight loss

Back 85

net loss of total surplus

Front 86

market failure

Back 86

a situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumer and producers.

Front 87

shortage

Back 87

happens when maximum price ceiling is set below price equilibrium.

Front 88

surplus

Back 88

when maximum price is greater than the equillibrium

ex of price floor: minimum wage

Front 89

import quotas

Back 89

limit on the quantity of a good that can be imported into their country

Front 90

tariffs

Back 90

tax placed on the imported good