colander 2 Flashcards
Market Economy
Economic system based on private property and a market where individuals decide how, what, and for whom to produce
Movement along a Demand Curve
The graphical representation of the effect of a change in price on the quantity demanded.
Movement along a Supply Curve
The graphical representation of the effect of a change in price on the quantity supplied.
Third Party Payer Market
The person who receives the good differs from the person paying the good.
Necessity
A good that has an income elasticity between 0 and 1
factors affecting the number of substitutes in demand
time period considered, the degree to which the good is a luxury, the market definition, & the importance of the good in one’s budget
what is the most important factor affecting the number of substitutes for supply?
time
when a supplier with an elastic demand lowers its price, what happens to total revenue?
total revenue will increase, because sales will increase more than the change in price.
when a supplier with an elastic demand raises price, what happens to total revenue?
total revenue will decrease.
Rent-Seeking Activities
Activities designed to transfer surplus from one group to another
Public Choice Economists
Economists who integrate an economic analysis of politics with their analysis of the economy
General Rule of Political Economy
When small groups are helped by a government action and large groups are hurt by that same action, the small group tends to lobby far more effectively than the large group; thus, policies tend to reflect the small group’s interest, not the interest of the large group
Welfare Loss Triangle
Caused by a deviation from a supply/demand equilibrium
Central Problem of Political Economy
You red government to ensure that competition works, but government can also be used to prevent competition.
Long Run & Short Run Effects of Price Controls
In the long run, supply tends to be more elastic than in the short run.
Effluent Fees
Charges imposed by government on the level of pollution created
Optimal Policy
One in which the marginal cost of undertaking the policy equals the marginal benefit of that policy.
Adverse Selection Problem
Problem that occurs when buyers and sellers have different amounts of information about the good for sale and use that information to the detriment of the other.
Moral Hazard Problem
Problem that arises when people don’t have to bear the negative consequences of their actions.
Signaling
An action taken by an informed party that reveals information to an uninformed party that offsets the false signal that caused the adverse selection problem in the first place
Screening
Action taken by the uninformed party that induces the informed party to reveal information
