Econ Jargon

Question 0

Substitute

Answer 0

A good that has many of the same characteristics and can be used in place of another good.

Question 1

Principles of Microeconmics

Answer 1

1. People face trade offs
2. Cost of something is what you give up to get something
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are a good way to organize an economy
7. Governments can sometimes improve market outcomes

Question 2

Complement

Answer 2

A good usually consumed or used together with another good.

Question 3

Normal Good

Answer 3

A good for which demand increases when income increases and decreases when
income falls.

Question 4

Market Failure

Answer 4

Situation in which a market economy does not lead to efficiency

Types: monopoly and oligopoly, externality, public good, asymmetry of information

Question 5

Absolute Advantage

Answer 5

The ability to produce a good using fewer inputs than another producer. The ability to produce more output with the same inputs.

Question 6

Comparative Advantage

Answer 6

The ability to produce a good at a lower opportunity cost than another producer.

Question 7

Opportunity Cost

Answer 7

The value of the next best forgone alternative

Question 8

Surplus

Answer 8

Situation in which quantity supplied is greater than quantity demanded.

Question 9

Price Ceiling

Answer 9

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

Question 10

Price Floor

Answer 10

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

Question 11

Output Quota

Answer 11

Government policy that restricts the quantity supplied of a good.

Question 12

Subsidy

Answer 12

Payment by the government for the production or consumption of a good or service.

Question 13

Deadweight Loss

Answer 13

A loss in social surplus.

Measure of inefficiency in a market.

DWL triangle always points to the Q* quantity.

Question 14

Principal-Agent Problem

Answer 14

A situation in which conflicting incentives make it difficult to motivate an agent to act on behalf of the principal.

Question 15

Transaction Costs

Answer 15

Costs incurred while buying or selling in a market.

Question 16

Rationality

Answer 16

Systematic and purposeful behavior according to one’s preferences. Doing the best you can to achieve your objectives.

Question 17

Irrationality

Answer 17

Behavior that violates ones own preferences (eg not maximizing utility) or behavior that goes against assumptions of rationality in standard economics.

Question 18

Irrationality - Context Effects and Incentive Effects

Answer 18

Context Effects - Anchoring Bias, Relativity Bias, Availability Bias

Incentive Effects - incentives, meaning, ownership

Question 19

Political Economy Principal-Agent Problem

Theory of capture

Answer 19

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.

Question 20

Coase Theorem

Answer 20

Private negotiations to fix a public problem (like an externality).

Question 21

Pareto Efficiency

Answer 21

Resource allocation in which it is not possible to make one person better off without making someone else worse off.

Question 22

Direct Effects

Answer 22

Explicit, intended consequences

Question 23

Indirect Effects

Answer 23

Unintended, secondary, ripple effect like consequences

Question 24

Tangible Effects

Answer 24

Effects of a policy or program that are easily identified and measured. Usually quantifiable and monetized.

Question 25

Intangible Effects

Answer 25

Effects of a policy or program that are difficult of identify or measure.

Question 26

Transfer

Answer 26

An offsetting reallocation of resources between members of society that does not result in an overall change in net benefits.

Question 27

Kaldor-Hicks Efficiency

Potential Pareto efficiency

Answer 27

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.

Question 28

Pigouvian Tax

Answer 28

Corrective government tax or subsidy to fix an externality

Question 29

How to fix an externality

Answer 29

1. Private solutions

2. Government solutions - separation/integration, regulation, corrective taxes or subsidies, tradable permits

Question 30

How to fix public good market failure?

Answer 30

1. Private negotiations
2. Gov assigns property rights
3. Gov regulation
4. Gov establishes market based solution

Question 31

Why do public goods cause market failure?

Answer 31

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

Question 32

Moral Hazard

Answer 32

Reduced incentive to avoid an insured against event

Question 33

Adverse Selection

Answer 33

A hidden characteristic allows the informed take advantage of the uninformed. Lower quality products drive out higher quality products and/or the market collapses.