Chapters 16, 17, & 19 Flashcards
consumer optimum
combination of goods and services that maximizes consumer’s utility for a given income or budget
diamond-water paradox
explains why water (essential to life) is expensive while diamonds (do not sustain life) are expensive
diminishing marginal utility
occurs when marginal utility declines as consumption increases
marginal utility
additional satisfaction derived from consuming one more unit of a good or service
real-income effect
occurs when there is a change in purchasing power as result of change in price of good
substitution effect
occurs when consumer substitute a product that has become relatively less expensive as the result of a price change
util
personal unit of satisfaction used to measure the enjoyment from consumption of a good or service
utility
measure of the level of satisfaction that a consumer enjoys from the consumption of goods and services
indifference curve
represents the various combinations of two goods that yield the same level of personal satisfaction, or utility
maximization point
point at which a certain combination of two goods yields the most utility
budget constraint
set of consumption bundles that represent the maximum amount the consumer can afford
marginal rate of substitution (MRS)
rate at which a consumer is willing to trade one good for another along an indifference curve
perfect substitutes
exist when the consumer is completely indifferent between two goods, resulting in a straight-line indifference curve with a constant marginal rate of substitution
perfect complements
exist when the consumer is interested in consuming two goods in fixed proportions, resulting in a right-angle indifference curve
behavioral economics
field of economics that draws on insights from experimental psychology to explore how people make economic decisions
bounded rationality
limited reasoning
proposes that although decision-makers want a good outcome, either they are not capable of performing the problem solving that traditional economic theory assumes or they are not inclined to do so
gambler’s fallacy
belief that recent outcomes are unlikely to be repeated and that outcomes that have not occurred recently are due to happen soon
hot hand fallacy
belief that random sequences exhibit a positive correlation (relationship)
framing effect
occurs when people change their answer depending on how the question is asked (or change their decision depending on how alternatives are presented
priming effect
occurs when the order of the questions influences the answers
status quo bias
exists when decision-makers want to maintain their current choices
intertemporal decision-making
involves planning to do something over a period of time, which requires valuing the present and the future consistently
ultimatum game
economic experiment in which two players decide how to divide a sum of money
Risk-average people
prefer a sure thing over a gamble with a higher expected value
Risk-neutral people
choose the highest expected value regardless of the risk
Risk-takers
prefer gambles with lower expected values, and potentially higher winnings, over a sure thing.
Prospect theory
suggests that individuals weigh the utilities and risks of gains and losses differently
net exports
total exports of final goods and services minus total imports of final goods and services
trade balance
difference between its totaldeficit exports and total imports
trade surplus
occurs when exports exceed imports, indicating a positive trade balance
trade deficit
occurs when imports exceed exports, indicating a negative trade balance
comparative advantage
refers to the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can
Protectionism
blanket term for government actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition
Tariffs
taxes levied on imported goods and services
import quotas
limits on the quantity of products that can be imported into a country
infant industry argument
states that domestic industries need trade protection until they are established and able to compete internationally
Dumping
occurs when a foreign supplier sells a good below the price it charges in its home country
