EC109 Term 2 Flashcards

1
Q

Descriptive models

A

Models of how people actually make decisions

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2
Q

Normative models

A

Models of how people ought to make decisions if they wish to achieve a given objective

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3
Q

Explanatory models

A

Examine the mechanisms underlying some phenomenon

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4
Q

Predictive models

A

Make predictions about the economy

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5
Q

Exogenous variables

A

Background variables which are not the main focus on the model.

These are ‘fixed’, i.e. assumed to take a certain value with no need for any explanation by the modeller.

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6
Q

Endogenous variables

A

These are the variables we want to understand/predict/explain.

Free to vary in response to changes in the environment (exogenous vars.).

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7
Q

Partial equilibrium models distinguish between…

A

Exogenous and endogenous variables

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8
Q

Models as maps

A

They are abstractions
They do not perfectly describe the terrain
They deliberately sacrifice realism for clarity
Map are adapted for different applications
Certain styles of map become dominant due to ease of use

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9
Q

What sort of information do prices convey?

A

Prices provide information about the relative scarcity of goods
Price changes can reveal changes in buyers’ willingness to pay
Producers use price changes to guide their decision making

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10
Q

Prices can coordinte economic activity by aggregating information? What can go wrong? (3)

A

Externalities
Asymmetric information
Imperfect information

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11
Q

Efficient market hypothesis (EMH)

A

Prices reflect all available information

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12
Q

Ex-ante

A

Before the event

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13
Q

A Social choice problem

A

The problem of ranking items which differ along several different dimensions

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14
Q

A way to explain what a social welfare function is

A

Aggregating the welfare of individuals in to a society wide welfare measure (a numerical ‘score’ like a utility)

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15
Q

Utilitarian social welfare function

A

Sum of all utilities

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16
Q

Dictorial social welfare function

A

Compare only along one dimension

17
Q

Weighted utilitarian social welfare function

A

Weighted sum of all utilities

18
Q

Rawlsian social welfare function

A

Measure social welfare by the impact on the individual who is made worst-off

19
Q

Paerto optimality

A

A minimum necessary condition for an outcome to be efficient/optimal/desirable

An outcome in which we cannot make a Pareto improvement.

20
Q

Random serial disctatorship or random priority mechanism

A

Step 1: Have agents submit their ranked list of preferences
Step 2: Randomly assign each agent a place in a ‘virtual queue’
Step 3: 1st place agent in the queue gets their first choice
Step 4: 2nd place agent in the queue gets their top choice of the remaining houses.
Step N: Last place agent in the queue gets their top choice of remaining houses.

Result: This simple mechanism is Pareto efficient and Strategy-proof (but potentially very unfair for the person who is last!)

21
Q

Payoff dominant outcome

A

An outcome which is Pareto superior to all the others

Is stable (NE) but requires coordination

22
Q

Coordination failure

A

A situation where multiple parties fail to coordinate their actions on a mutually beneficial outcome

NEs may exist but are undesireable for all parties. They lack coordination, not incentive.

23
Q

Assumptions of the Cournot Model

A

Products are homogenous

Firms are homogenous

Firms pick their output

Price determined by joint output produced

Firms compete just once and pick outputs without observing the other’s decision

There is no entry by other producers

No fixed cost and constant marginal cost

24
Q

Joseph Bertrand’s critique of Cournot’s model in 1883

A

Quantity competition is not realistic - firms usually pick prices

25
Milton Friedman 'as if' argument - what it means
It doesn't show how people really play billiards, predicting exact angles, etc. However, models would make good predictions on how they would play
26
Market demand depends on...
Price of good of interest Prices of other goods in the economy Vector of all incomes
27
Issues with Consumer (and Producer) Surplus
Does not account for distributional concerns Each consumer/producer has the same weight in this function Does not distinguish between changes along intensive and extensive margin
28
Comparing the effects of tariffs and quotas
Tariffs and quotas both: -Raise domestic prices -Support domestic producers Comparing effect of tariff vs quotas: -Consumer and domestic producer surplus identical -Quotas no better than tariffs, can be worse (unless import prices are restricted)
29
Deadweight loss
Any surplus which is lost following a change in prices/quantities
30
Two flaws with backwards indusction
It cannot be applied to games of imperfect information It cannot be applied to games without a finite end point
31
What is a subgame?
Any part of the game which begins at a single decision node and contains all successor nodes.
32
Contestable market definition
Entry and exit is costless Entrants can undercut the monopolist and exit at no cost The monopolist can only prevent this by pricing at average cost, limiting deadweight loss.
33
Characteristics of monopolistic competition
Firms can control prices Perfect information Large numbers of buyers and sellers No technological barriers to entry
34
Assumptions of the Cournot Model
Products are homogeneous Firms pick their output Price determined by joint output produced Firms compete just once and pick outputs without observing the other's decision No fixed cost and constant marginal cost
35
Assumptions of the Bertrand Model
Products are homogeneous Firms pick prices Buyers know all prices and buy from the chepaest firm Firms compete just once and pick prices without observing the other's decision No fixed cost and constant marginal cost
36
Bertrand paradox
Two firms competing on prices make zero profit But in the Cournot model, two firms competing on quantities made positive profit This is actually a surplus maximising outcome - we get social efficiency without needing free entry or large N
37
Oligopoly - conclusions with Bertrand and Cournot
Corunot - profitability is higher in markets with more concentration of market power (fewer firms). In Bertrand, profitability is low even with only two firms. Differences in the predictions of the baseline models will narrow if we allow for product differentiation
38
Arrow's Impossibility Theorem
There is no perfect SWF which: 1. Allows individuals to be free to rank alternatives any way they like. 2. Ranks 𝐴 ≻ 𝐵 whenever 𝐴 ≻𝑖 𝐵 for all individuals 𝑖. (‘Unanimity’) 3. Accounts for the wishes of multiple individuals and does not always mimic the preferences of a single individual. (‘No dictatorship’) 4. Is complete and transitive. 5. Satisfies ‘Independence of Irrelevant Alternatives’: If we rank 𝐴 ≻ 𝐵 when the options are 𝐴,𝐵, 𝐶 , we also rank 𝐴 ≻ 𝐵 when the options are {𝐴,𝐵, 𝐶,𝐷}.