Micro definitions Flashcards
Indifference curves
Shows all combinations of 2 goods which provide the same level of utility
Why do Indifference curves not cross?
Transitivity is violated if they cross. If A and B are points on 2 different I.D curves that cross and they both cross at C then A=C and B=C but A is somehow also greater than B which leads to the maths breaking down. Hence they must not cross.
What are the 4 properties of preference?
Completeness
Consistency
Non-satiation
Diminishing marginal rate of substitution
What is consumer preference
It is the choices the consumer makes to maximise their satisfaction`
Completeness
Being able to rank goods based on the amount of utility they provide
Consistency
Assuming that the consumer is logically consistent
Non-satiation
Diminishing marginal rate of substitution
(MRS)
In order to keep utility constant you must sacrifice one good in order to gain a unit of another good.
MRS
The absolute value of the gradient of the indifference curve.
AND!
The willingness to trade one good for another good.
What does a Utility function do?
It mathematically represents I.D curves and preferences
Opportunity cost
The net benefit of the next foregone action.
The cost of the next best alternative when making a decision.
Economic Cost
Monetary cost + Opportunity cost
Economic Rent
An amount of money earned that exceeds what is economically necessary.
(Market Inefficiency)
Enjoyment cost - actual/economic cost
Feasible frontier
Shows the max output that can be achieved with given inputs
Marginal rate of transformation
The number of units of one good that must be sacrificed to produce an additional unit of another good
Optimal choice
Where the I.D and the MRT curves meet.
What is the relationship between MRT and wage
MRT = Wage
Income Effect
Change in levels of consumption due to changes in one’s income.
Substitution Effect
When a consumer replaces one product with another due to a change in relative prices.
How does the Substitution effect work in terms of income and free time in the case of a wage increase?
If there is a wage increase, then the OC of more free time increases as the income is now greater (budget constraint curve is steeper, MRT increases). Hence people are more inclined to give up more hours of free time as they are able to make more money if they choose this option.
How does the Income effect work in terms of income and free time in the case of a wage increase?
If there is an increase in income then this leads to more free time being taken as people can now afford to do so.
Is the budget constraint a feasible frontier
The budget constraint is the feasible frontier of the available combinations of free time and consumption. Its slope is constant, so the MRT is constant.
How does the substitution effect affect the budget constraint
Changes the gradient of the budget constraint
How does the income effect affect the budget constraint
Leads to a parallel shift of the budget constraint.
What is the function of money
Money allows purchasing power to be transferred among people so that they can exchange goods and services
What is wealth
The total value of assets owned by a person minus any debts.
What is income
The amount of money you receive over some period of time, whether from market earnings, investments, or from the government.
Net income
Income after taxes and depreciation
Also known as disposable income.
Discount rate
The slope of the indifference curve minus one, which is a measure of how much a person values an extra unit of consumption now, relative to an extra unit of consumption later.
What are the two factors that affect the discount rate?
Person’s desire to smooth consumption and their pure impatience as a person.
What does a selfish person’s I.D curve look like?
It is vertical
What does a somewhat altruistic person’s I.D curve look like?
Curved downwards.
What does a selfless person’s I.D curve look like?
It is horizontal.
Are preferences fixed?
Yes, they always remain the same throughout the problem.
Reciprocity
The friend may have been kind to the lucky money-finder in the past, or kind to others, and deserves to be treated generously because of this. In this case we say that our money-finder has reciprocal preferences.
Nash Equilibrium
A set of strategies, one for each player in the game, such that each player’s strategy is a best response to the strategies chosen by everyone else.
Pareto criterion
According to the Pareto criterion, allocation A dominates allocation B if at least one party would be better off with A than B, and nobody would be worse off.
Pareto efficient
Occurs when it is impossible to make one party better off without making someone worse off.
Reservation option
The final option if all else fails.
Pareto- efficiency curve
The set of all allocations that are Pareto efficient.
What does the first order condition describe?
It describes the optimal behaviour of an agent.
What is pure impatience
Someone who values an additional unit of consumption now than later. This may occur due to myopia, weakness of will or prudence.
What is Myopia
People experience present satisfaction over that in the future.
What is Prudence
People know they may not be around in the future so spend more now than later.
What does it mean if the slope of consumption now against later is smaller than 1?
Means that the person values consumption in the future more than consumption in the present suggesting that they are not impatient and can wait to consume in the future.
Social dilemma
A situation in which actions, taken independently by individuals in pursuit of their own private objectives, may result in an outcome that is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals.
What is altruism
The willingness to bear a cost in order to benefit somebody else
Institutions
Institutions do not refer to organisations or the buildings
they occupy, but rather refers to the rules of the game that specify who can do what,
when they can do it, and how each player’s actions determine their payoff.
Pareto improvement
When a change in allocation harms no one and helps at least one person
What does a steeper I.D curve indicate
That the person is more selfish/ higher impatience.
