Econ Jargon Flashcards
Substitute
A good that has many of the same characteristics and can be used in place of another good.
Principles of Microeconmics
- People face trade offs
- Cost of something is what you give up to get something
- Rational people think at the margin
- People respond to incentives
- Trade can make everyone better off
- Markets are a good way to organize an economy
- Governments can sometimes improve market outcomes
Complement
A good usually consumed or used together with another good.
Normal Good
A good for which demand increases when income increases and decreases when
income falls.
Market Failure
Situation in which a market economy does not lead to efficiency
Types: monopoly and oligopoly, externality, public good, asymmetry of information
Absolute Advantage
The ability to produce a good using fewer inputs than another producer. The ability to produce more output with the same inputs.
Comparative Advantage
The ability to produce a good at a lower opportunity cost than another producer.
Opportunity Cost
The value of the next best forgone alternative
Surplus
Situation in which quantity supplied is greater than quantity demanded.
Price Ceiling
Government policy that establishes a maximum price for a good.
Prices are below market equilibrium and there is a shortage of the product. There is DWL in the market and demand for product is not a true reflection of willingness to pay.
Ex: rent control
Price Floor
Government policy that establishes a maximum price for a good. Prices are higher than the equilibrium price and there is a surplus of supply of people who want to work.
Ex: minimum wage
Output Quota
Government policy that restricts the quantity supplied of a good.
Subsidy
Payment by the government for the production or consumption of a good or service.
Deadweight Loss
A loss in social surplus.
Measure of inefficiency in a market.
DWL triangle always points to the Q* quantity.
Principal-Agent Problem
A situation in which conflicting incentives make it difficult to motivate an agent to act on behalf of the principal.
Transaction Costs
Costs incurred while buying or selling in a market.
Rationality
Systematic and purposeful behavior according to one’s preferences. Doing the best you can to achieve your objectives.
Irrationality
Behavior that violates ones own preferences (eg not maximizing utility) or behavior that goes against assumptions of rationality in standard economics.
Irrationality - Context Effects and Incentive Effects
Context Effects - Anchoring Bias, Relativity Bias, Availability Bias
Incentive Effects - incentives, meaning, ownership
Political Economy Principal-Agent Problem
Theory of capture
Theory of capture
Bureaucrats or politicians who are supposed to be acting in the public interest end up acting systematically in favor of small interest groups.
Coase Theorem
Private negotiations to fix a public problem (like an externality).
Pareto Efficiency
Resource allocation in which it is not possible to make one person better off without making someone else worse off.
Direct Effects
Explicit, intended consequences
Indirect Effects
Unintended, secondary, ripple effect like consequences
Tangible Effects
Effects of a policy or program that are easily identified and measured. Usually quantifiable and monetized.
Intangible Effects
Effects of a policy or program that are difficult of identify or measure.
Transfer
An offsetting reallocation of resources between members of society that does not result in an overall change in net benefits.
Kaldor-Hicks Efficiency
Potential Pareto efficiency
Resource allocation in which one person is made better off and at least one person is worse off but side payments can be made that would lease both people better off.
Winners compensate the losers in a side deal.
Pigouvian Tax
Corrective government tax or subsidy to fix an externality
How to fix an externality
- Private solutions
2. Government solutions - separation/integration, regulation, corrective taxes or subsidies, tradable permits
How to fix public good market failure?
- Private negotiations
- Gov assigns property rights
- Gov regulation
- Gov establishes market based solution
Why do public goods cause market failure?
Don’t know consumers true willingness to pay
Free rider problem - no incentive to pay and no incentive for private firms to solve the problem
Moral Hazard
Reduced incentive to avoid an insured against event
Adverse Selection
A hidden characteristic allows the informed take advantage of the uninformed. Lower quality products drive out higher quality products and/or the market collapses.
