Microeconomics Flashcards
Optimization
Everyone chooses their optimal alternative
Equilibrium
No Individual player has an incentive to change his actions in this scenario
Empiricism
Using Data to find answers to interesting questions
Ommited variables
An ommited variable is causaly related to a situation and must be taken into account
Reverse Causality
To Variables are Causalated but in the reverse order one expected
Positive Economics
Describes and Explains what actually happens in a market
Normative
Describes and explains how markets should really behave
Budget line
The budget line descsribes all posible consumption bundles that exhaust the consumers budget
Completeness principle
A consumer is never uncertain about what bundle of products he should buy (although he can be indifferent between bundles)
Monotinicity principle
Consumers preffer more products over less products of the same type
Convexity principle
Consumer preffer averages over extremes (A+B is better than 2A or 2B)
Utility function
The Utility function assigns a number to a consumption bundle that shows the consumers benefit of buying the bundle
Marginal utility (MU)
Gain in utility per unit (the partial derivative of utility with respect to the product)
Marginal rate of substitution (MRS)
The consumers willingness to replace consumption of product A through consumption of product B -(MU of A / MU of B)
Indifference curve
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
Price elasticity of demand
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)
Values of the Price elasticity of demand
- Between 0 and 1: Inelastic
- Higher than 1 Elastic
- Unit elastic
Income elasticity of demand
The responsiveness of demand of a product to a 1% change in income (percentage change in demand divided by percentage change in income)
Values of the Income elasticity of demand
- More than 0: Normal good->As income increases demand increases too
- Less than 0: Inferior Good-> As income increases demand decreases (bus rides)
Cross elasticity of demand
percentage change in demand for product a divided by percentage change in demand for product b
Values of the Cross elasticity of demand
> 0: Substitutes
0: Independend
<0: Complements
Characteristics of Perfectly competitive markets
- Fragmentation: Each player on the market is so small that he can´t influence the price
- Undiferentiadted/homogenous products: consumers persieve products identical regardless to who manufactured them
- Consumers have perfect information about competitors prices ->Transactions always occur at the market price
- Buyers and sellers are price takers
Profit under perfect competition
Each firm trys to maximize profits (pi)
Marginal revenue
Absolute change in revenue due to a change in quantity (derivative of the revenue function with respect to quantity)
Marginal cost
Absolute change in costs due to a change in quantity (derivative of the cost function with respect to quantity)
Profit maximization in perfect markets
pi(q)=R(q)-C(q) / the first derivative of pi=0 and the second deriavative is negative
Why do Marginal Cost increase?
- Scarce Factors: It is harder to increase efficiency close to the PPC
- High Demand drives up prices causing inefficient firms to enter the market, decreasing average MC
When do companys maximize profits in perfect markets?
When price=marginal cost and the SOC is negative
Production function
Shows the outputs a company can produce given input goods q(x1, x2)
Optimal input combination
The optimal constrainted or unconstrainted combination of inputs that results in the highest possible production level
Isocosts
Set of all possible production inputs for a firm that have the same cost
Shutdown condition
If profit - quasi fixed cost is less than 0 the firm would not produce
Consumer surplus
The monetary gain of consumers as they can puruchase goods at market price that is lower as some were willing to pay
Producer surplus
Monetary gain of producers as the equilibrium price is higher than the price they were willing to sell at
Social wellfare
Consumer surplus + Producer surplus (Kaldor Hicks and Pareto Efficient)
Taxes
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
Subsidy
Creates a DWL as the government has to pay producers the subsidy*quantity_sold
Marginal private cost (MPC)
The cost of production or purchase of a good to the producer
Marginal Social Cost (MSC)
The cost of the product to the entire society including the producer
Marginal external cost (MEC)
Cost of producing each unit to people other than the producer
Negative externality
We only covered negative externality of production
Negativ externality of production
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)
Positive Externality
We only covered positive externality of consumption
Positive externality of consumption
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
MPB
Marginal private benefit
MSB
Marginal social Benefit
MEB
Marginal external benefit
Monopoly
There is a single seller
Profit for a Monopolist
- pi(q)=R(q)-C(q)
- derivative of pi(q)=0
- 2nd derivate of pi(q) is negative
- Insert q into the demand function
Monopolies: Dynamic Aspects
Monopolies may increase incentives to innovate
Natural Monopolies:
High Fixed Costs cause all but one supplier to drop out of the market (DB)
Benefits of Natural Monopolies
The network effect may render a natural monopoly optimal
Price Discrimination
May cause increases in efficiency but also exploit consumers
First Degree Price Discrimination
Each Unit is sold at the maximum price the consumer is willing to pay, CB is zero but there is no DWL
Second Degree Price Discrimination
Consumers are grouped according to their demand and their price is the group price (Quantity Discounts)
Third Degree Price Discrimination
Consumers are grouped in their wilingness to pay and prices are set for eachh group (student / senior prices)
Game Theory
Study of Multiperson Decision making
Strictly Dominant Strategy
A strictly dominant strategy yields a higher payoff in all circumstances/regardless of the opponents choice
Weakly Dominant Strategy
A weakly Dominant Strategy yields a higher or equal payoff in all circumstances/regardless of the opponents choice
Pareto Efficiency
A situation where no player can increase his utility without decreasing the utility of another player
Kaldor-Hicks Efficency
A situation where there is the highest overall utility
Nash Equilibrium
No player can imporve his utility by deviating if the other player stick to their strategy (use the underlying technique)
Mixed Strategies
Players assign probabilities to choices so that the other player is indifferent between his strategies
Infinite horizon
The number of repetitions is unknown (Colaborative outcomes may occur)
Grim Trigger Strategies
A player always plays colaborative until the other competes once, then he always chooses to compete
Characteristics of Experimental economics
- Simplicity and replicability
- Use of monetary incentives
- No Deception by the game makers
- Participants may not communicate
Purposes of economic experiments
- Testing Hypothesis
- Searching for new economic hypothesis
- Helping Politicians to make policies
What motivates people to deviate from selfishness?
Altruism, Efficiency concerns, Positive reciprocity, Negative reciprocity, Inequality aversion, Inequity aversion
Altruism
Kindness, likes to help others
Efficiency concerns
Want to increase the sum of total payoffs
Positive reciprocity
Respond positively to an positive act
Negative reciprocity
Respond negative to a negative act
Inequity aversion
Wants to achieve fair outcomes
Inequality aversion
Wants to achieve equal outcomes
Dictator Game
Player A splits 100€ and Player B has to accept the proposed split
Ultimatum Game
Player A splits 100€ and Player B can accept the proposed split or reject it
Investment Game
A trustor gets 10€ and decides if he gives any money to the trustee who can multiply it and give any amount back
Characteristics of public goods
Non-rivalry in consumption: Many people can use it at the same time
Non-excludability: People who didnt pay cant be excluded from usage
Behavourial economics
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? )
Non-Standart prefferences in behavioural economics
- Time Preference
- Risk Preference
- Social Preference
Bounded rationality
When people have behavioural biases
Behavioural biases
Not acting like a homo economicus
Allais Paradox
Small probabilities are overweighted and big are underweighted
Asian Disease Experiment
On average people will take gains but are risk seeking for avoiding losses
Prospect Theory
- Gains / losses are evaluated relative to a reference point
- People are risk averse for gains and risk seeking for losses
Fraiming Effect
People are susceptible to manipulation through phrasing (save/die contrast)
Transivity principle
If a consumer prefferes x to y and y to z he also prefferes x to z
