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29 Cards in this Set
- Front
- Back
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Moral Hazard |
Is the process in which you are more likely to take on risks, because the costs are not borne by the party taking the risks e.g. insure your house and if anything was to happen you dont loose anything. so therefore you will be less carefull as the insurance company will bear the loss |
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Substitution Effect |
An effect caused when a price of a good increases (income remains the same) to buy more of a cheaper good |
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Oligopoly -example -characteristics |
Airlines, Oil companies -Few Products -Standardised/differentiated product -power over price -high barriers to entry -alot of strategic interaction |
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Monopolistic Competition -example -characteristics |
Cafes, Retail -many products -some power over price -low barriers to entry -little strategic interaction |
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1st Degree Price Discrimination |
Occurs when a consumer is charged a price they are willing to pay for a product -sells at multiple prices so consumer surplus=0 |
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Income Effect |
Is when your income increases so you have unspent income and tend to buy more of good 1 or both goods |
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Remmedies to Overcome Assymetric Info |
-Offer a menu of options, so individuals reveal stuff about themselves -In large firms- offer a entry level wage then promote productive workers. |
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Sources of Monopoly Power |
- exclusive control over inputs (diamonds) -Government Licences (NZ post) -Economies of scale (Railways) |
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3rd Degree Price discrimination |
Is when people have different elasticities of demand through; age, sex, time of purchase etc. -Tourist vs Buisnessman traveling at peak hours -Buying Easter eggs just before Easter -Seniors on a bus, with special card |
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The rational choice model |
the economic theory that individuals make logical decisions that provide them with the greatest benefit and that which are in their own self-interest the economic man-ignores sunk costs and wealth is interchangerble |
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Griffin good |
a inferrior good with no close substitutes |
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Perfect Competition -example -characteristics |
Road side vege seller -little to no barriers to entry -standardised product -many sellers -no power over price -no strategic interation |
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What ruins efficient markets |
When governments intervene and cause a DWL through: taxes, subsidys, tarrifs,price controls |
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Monopoly -example -characteristics |
Electricity/water companies -One product -unique product -very high barriers to entry -price makers -no interation with rivals |
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2nd degree price discrimination |
Consumers are offered bulk buying, 2 for 1, the more you buy the less you pay objective: to make the consumer spent more than they initially intended |
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Winners Curse |
A tendency for the winning bid in an auction to exceed the intrinsic value of the item purchased |
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4 properties of indifference curves |
-dont cross -negatively sloping -bowed inwards -higher indifference curves are preffered to lower |
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Intertemporal Price discrimination |
Charge a high price when the good first comes out then lower the price e.g. Iphone 6 |
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Signalling |
when a party conveys some info about itself to another party |
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For Price discrimination to work it requires |
-No power over price -no arbitage -info about willingness to pay |
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Adverse Selection |
When you are able to have hidden information e.g. foiling a insurance companies evaluation to get a higher coverage at a lower premium |
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Stratergies to Encourage Cooperation |
Tit for Tat -ill cooperate, but if you defect ill defect Goldern rule -Always cooperate Grim Stratergy -Well both charge a high price provided none of us has cheated |
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Markets fail when and because of |
They dont maximise social gain -externalities -information problems -imperfect competition |
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Households and Individuals Choices |
individuals have their own tastes and prefernces and want to maximise their own happiness through making rational and choices within their budget line |
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Invisible Hand |
A metaphor used to describe uninteded social benefits from individuals actions many self interested firms and individuals act as if they are led by an individuals hand -causes drive for competition and increase efficency |
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4 Auction Types |
-Ascending- Bid auction -Decending- Bid auction -second price sealed bid |
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Pricing plans to extract consumer surplus |
-Bundling -Two Part Tarrif -price descrimination |
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invisible hand works when |
-no barriers to entry -property rights are defined and enforced -buyers and sellers have the same information (complete info) |
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MRS (marginal Rate of Substitution) |
maximum amount of good 2 consumer is willing to give up to get 1 more of good 1 |
