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FS > Microeconomics > Flashcards

Microeconomics Flashcards

1
Q

Optimization

A

Everyone chooses their optimal alternative

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2
Q

Equilibrium

A

No Individual player has an incentive to change his actions in this scenario

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3
Q

Empiricism

A

Using Data to find answers to interesting questions

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4
Q

Ommited variables

A

An ommited variable is causaly related to a situation and must be taken into account

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5
Q

Reverse Causality

A

To Variables are Causalated but in the reverse order one expected

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6
Q

Positive Economics

A

Describes and Explains what actually happens in a market

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7
Q

Normative

A

Describes and explains how markets should really behave

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8
Q

Budget line

A

The budget line descsribes all posible consumption bundles that exhaust the consumers budget

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9
Q

Completeness principle

A

A consumer is never uncertain about what bundle of products he should buy (although he can be indifferent between bundles)

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10
Q

Monotinicity principle

A

Consumers preffer more products over less products of the same type

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11
Q

Convexity principle

A

Consumer preffer averages over extremes (A+B is better than 2A or 2B)

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12
Q

Utility function

A

The Utility function assigns a number to a consumption bundle that shows the consumers benefit of buying the bundle

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13
Q

Marginal utility (MU)

A

Gain in utility per unit (the partial derivative of utility with respect to the product)

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14
Q

Marginal rate of substitution (MRS)

A

The consumers willingness to replace consumption of product A through consumption of product B -(MU of A / MU of B)

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15
Q

Indifference curve

A

Curve of consumption bundles where consumers are indifferent between the bundles because they have the same utility, the slope od the inderence curve is the MRS

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16
Q

Price elasticity of demand

A

The percentage change in demand in relation to a 1% change in price (The slope of the demand function or the percentage change of demand divided by the percentage change in price)

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17
Q

Values of the Price elasticity of demand

A
  1. Between 0 and 1: Inelastic
  2. Higher than 1 Elastic
  3. Unit elastic
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18
Q

Income elasticity of demand

A

The responsiveness of demand of a product to a 1% change in income (percentage change in demand divided by percentage change in income)

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19
Q

Values of the Income elasticity of demand

A
  1. More than 0: Normal good->As income increases demand increases too
  2. Less than 0: Inferior Good-> As income increases demand decreases (bus rides)
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20
Q

Cross elasticity of demand

A

percentage change in demand for product a divided by percentage change in demand for product b

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21
Q

Values of the Cross elasticity of demand

A

> 0: Substitutes
0: Independend
<0: Complements

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22
Q

Characteristics of Perfectly competitive markets

A
  1. Fragmentation: Each player on the market is so small that he can´t influence the price
  2. Undiferentiadted/homogenous products: consumers persieve products identical regardless to who manufactured them
  3. Consumers have perfect information about competitors prices ->Transactions always occur at the market price
  4. Buyers and sellers are price takers
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23
Q

Profit under perfect competition

A

Each firm trys to maximize profits (pi)

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24
Q

Marginal revenue

A

Absolute change in revenue due to a change in quantity (derivative of the revenue function with respect to quantity)

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25
Q

Marginal cost

A

Absolute change in costs due to a change in quantity (derivative of the cost function with respect to quantity)

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26
Q

Profit maximization in perfect markets

A

pi(q)=R(q)-C(q) / the first derivative of pi=0 and the second deriavative is negative

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27
Q

Why do Marginal Cost increase?

A
  1. Scarce Factors: It is harder to increase efficiency close to the PPC
  2. High Demand drives up prices causing inefficient firms to enter the market, decreasing average MC
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28
Q

When do companys maximize profits in perfect markets?

A

When price=marginal cost and the SOC is negative

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29
Q

Production function

A

Shows the outputs a company can produce given input goods q(x1, x2)

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30
Q

Optimal input combination

A

The optimal constrainted or unconstrainted combination of inputs that results in the highest possible production level

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31
Q

Isocosts

A

Set of all possible production inputs for a firm that have the same cost

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32
Q

Shutdown condition

A

If profit - quasi fixed cost is less than 0 the firm would not produce

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33
Q

Consumer surplus

A

The monetary gain of consumers as they can puruchase goods at market price that is lower as some were willing to pay

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34
Q

Producer surplus

A

Monetary gain of producers as the equilibrium price is higher than the price they were willing to sell at

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35
Q

Social wellfare

A

Consumer surplus + Producer surplus (Kaldor Hicks and Pareto Efficient)

36
Q

Taxes

A

Create a DWL of Wellfare as the supply curve shifts to the left (up) and decreases quantitiy sold and increases price. This decreases the area of total wellfare

37
Q

Subsidy

A

Creates a DWL as the government has to pay producers the subsidy*quantity_sold

38
Q

Marginal private cost (MPC)

A

The cost of production or purchase of a good to the producer

39
Q

Marginal Social Cost (MSC)

A

The cost of the product to the entire society including the producer

40
Q

Marginal external cost (MEC)

A

Cost of producing each unit to people other than the producer

41
Q

Negative externality

A

We only covered negative externality of production

42
Q

Negativ externality of production

A

The Social cost is higher than the private cost, therefore there is a DWL. This can be fixed by a tax equal to the MEC (e.g. Cigarettes)

43
Q

Positive Externality

A

We only covered positive externality of consumption

44
Q

Positive externality of consumption

A

The social benefit is higher than the personal benefit, therefore there is a DWL or potential wellfare gain. The government can impose a subsidy=MEB to increase the gain

45
Q

MPB

A

Marginal private benefit

46
Q

MSB

A

Marginal social Benefit

47
Q

MEB

A

Marginal external benefit

48
Q

Monopoly

A

There is a single seller

49
Q

Profit for a Monopolist

A
  1. pi(q)=R(q)-C(q)
  2. derivative of pi(q)=0
  3. 2nd derivate of pi(q) is negative
  4. Insert q into the demand function
50
Q

Monopolies: Dynamic Aspects

A

Monopolies may increase incentives to innovate

51
Q

Natural Monopolies:

A

High Fixed Costs cause all but one supplier to drop out of the market (DB)

52
Q

Benefits of Natural Monopolies

A

The network effect may render a natural monopoly optimal

53
Q

Price Discrimination

A

May cause increases in efficiency but also exploit consumers

54
Q

First Degree Price Discrimination

A

Each Unit is sold at the maximum price the consumer is willing to pay, CB is zero but there is no DWL

55
Q

Second Degree Price Discrimination

A

Consumers are grouped according to their demand and their price is the group price (Quantity Discounts)

56
Q

Third Degree Price Discrimination

A

Consumers are grouped in their wilingness to pay and prices are set for eachh group (student / senior prices)

57
Q

Game Theory

A

Study of Multiperson Decision making

58
Q

Strictly Dominant Strategy

A

A strictly dominant strategy yields a higher payoff in all circumstances/regardless of the opponents choice

59
Q

Weakly Dominant Strategy

A

A weakly Dominant Strategy yields a higher or equal payoff in all circumstances/regardless of the opponents choice

60
Q

Pareto Efficiency

A

A situation where no player can increase his utility without decreasing the utility of another player

61
Q

Kaldor-Hicks Efficency

A

A situation where there is the highest overall utility

62
Q

Nash Equilibrium

A

No player can imporve his utility by deviating if the other player stick to their strategy (use the underlying technique)

63
Q

Mixed Strategies

A

Players assign probabilities to choices so that the other player is indifferent between his strategies

64
Q

Infinite horizon

A

The number of repetitions is unknown (Colaborative outcomes may occur)

65
Q

Grim Trigger Strategies

A

A player always plays colaborative until the other competes once, then he always chooses to compete

66
Q

Characteristics of Experimental economics

A
  1. Simplicity and replicability
  2. Use of monetary incentives
  3. No Deception by the game makers
  4. Participants may not communicate
67
Q

Purposes of economic experiments

A
  1. Testing Hypothesis
  2. Searching for new economic hypothesis
  3. Helping Politicians to make policies
68
Q

What motivates people to deviate from selfishness?

A

Altruism, Efficiency concerns, Positive reciprocity, Negative reciprocity, Inequality aversion, Inequity aversion

69
Q

Altruism

A

Kindness, likes to help others

70
Q

Efficiency concerns

A

Want to increase the sum of total payoffs

71
Q

Positive reciprocity

A

Respond positively to an positive act

72
Q

Negative reciprocity

A

Respond negative to a negative act

73
Q

Inequity aversion

A

Wants to achieve fair outcomes

74
Q

Inequality aversion

A

Wants to achieve equal outcomes

75
Q

Dictator Game

A

Player A splits 100€ and Player B has to accept the proposed split

76
Q

Ultimatum Game

A

Player A splits 100€ and Player B can accept the proposed split or reject it

77
Q

Investment Game

A

A trustor gets 10€ and decides if he gives any money to the trustee who can multiply it and give any amount back

78
Q

Characteristics of public goods

A

Non-rivalry in consumption: Many people can use it at the same time
Non-excludability: People who didnt pay cant be excluded from usage

79
Q

Behavourial economics

A

Atempts to increase the explanatory and predictive accuracy of Experimental economics. It is positive (What do people actually do? ) as opposed to normative (What should people do? )

80
Q

Non-Standart prefferences in behavioural economics

A
  • Time Preference
  • Risk Preference
  • Social Preference
81
Q

Bounded rationality

A

When people have behavioural biases

82
Q

Behavioural biases

A

Not acting like a homo economicus

83
Q

Allais Paradox

A

Small probabilities are overweighted and big are underweighted

84
Q

Asian Disease Experiment

A

On average people will take gains but are risk seeking for avoiding losses

85
Q

Prospect Theory

A
  • Gains / losses are evaluated relative to a reference point

- People are risk averse for gains and risk seeking for losses

86
Q

Fraiming Effect

A

People are susceptible to manipulation through phrasing (save/die contrast)

87
Q

Transivity principle

A

If a consumer prefferes x to y and y to z he also prefferes x to z

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