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29 Cards in this Set

  • Front
  • Back

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

Substitution Effect

An effect caused when a price of a good increases (income remains the same) to buy more of a cheaper good




Airlines, Oil companies

-Few Products

-Standardised/differentiated product

-power over price

-high barriers to entry

-alot of strategic interaction

Monopolistic Competition



Cafes, Retail

-many products

-some power over price

-low barriers to entry

-little strategic interaction

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

Income Effect

Is when your income increases so you have unspent income and tend to buy more of good 1 or both goods

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.

Sources of Monopoly Power

- exclusive control over inputs (diamonds)

-Government Licences (NZ post)

-Economies of scale (Railways)

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

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

Griffin good

a inferrior good with no close substitutes

Perfect Competition



Road side vege seller

-little to no barriers to entry

-standardised product

-many sellers

-no power over price

-no strategic interation

What ruins efficient markets

When governments intervene and cause a DWL

through: taxes, subsidys, tarrifs,price controls




Electricity/water companies

-One product

-unique product

-very high barriers to entry

-price makers

-no interation with rivals

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

Winners Curse

A tendency for the winning bid in an auction to exceed the intrinsic value of the item purchased

4 properties of indifference curves

-dont cross

-negatively sloping

-bowed inwards

-higher indifference curves are preffered to lower

Intertemporal Price discrimination

Charge a high price when the good first comes out then lower the price

e.g. Iphone 6


when a party conveys some info about itself to another party

For Price discrimination to work it requires

-No power over price

-no arbitage

-info about willingness to pay

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

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

Markets fail when and because of

They dont maximise social gain


-information problems

-imperfect competition

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

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

4 Auction Types

-Ascending- Bid auction

-Decending- Bid auction
-First price sealed bid

-second price sealed bid

Pricing plans to extract consumer surplus


-Two Part Tarrif

-price descrimination

invisible hand works when

-no barriers to entry

-property rights are defined and enforced

-buyers and sellers have the same information (complete info)

MRS (marginal Rate of Substitution)

maximum amount of good 2 consumer is willing to give up to get 1 more of good 1