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Hon 202 > Midterm2 > Flashcards

Midterm2 Flashcards

1
Q

Consumption possibilities

A

things you can afford to buy

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2
Q

utility

A

benefit or satisfaction from consuming a good or service

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3
Q

total utility

A

total benefit person gets from consumption of goods

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4
Q

marginal utility

A

change in total utility that results from unit increase in quantity of good consumed

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5
Q

diminishing marginal utility

A

marginal utility increases at a decreasing rate

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6
Q

utility maximizing choice

A

economic choice that results in the highest level of satisfaction or benefit for consumers

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7
Q

consumer equilibrium

A

where consumer achieves maximum satisfaction from goods and services they choose to consume given budget constraints

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8
Q

Paradox of value

A

we consume so much water that marginal utility is small, but total utility is large

we buy few diamonds, so marginal utility is large, but total utility is small

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9
Q

behavioral economics

A

limits on human brains ability to compute and implement rational decisions influence economic behavior

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10
Q

bounded rationality

A

rationality is bounded by computing power of human brain. so we rely on other methods like rule of thumb or gut instinct

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11
Q

bounded will power

A

less than perfect willpower that prevents us from making a decision that we know we’ll later regret

ex. alcohol, gambling

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12
Q

bounded self interest

A

limited self interest that sometimes results in suppressing own interests to help others

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13
Q

endownment effect

A

tendency for people to value something more highly simply because they own it

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14
Q

neuroeconomics

A

activity of human brain when person makes economic decision

Prefrontal cortex - rational decisions

hippocampus - irrational decisions

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15
Q

What is a budget line and how does it tell us how consumers act

A

budget line shows consumption possibilites based on income. The possibilites are limited by income. It shows a consumers’ constraint on choices and highlights the trade-offs they must make when choosing between different products

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16
Q

how do price/income changes shift budget line

A

when income increases -> budget line shifts outward
when income decreases -> budget ine shifts inward
when price increases -> budget line rotates inwards
when price decreases -> budget line rotates outwards

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17
Q

predictions of marginal utility theory

A

Fall in price leads to an increase in quantity demanded. Consumer increases consumption of that good.

Fall in price of one good decreases consumption of other good.

Income increase leads to increase in demand for both goods if they’re normal.

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18
Q

Budget Equation

A

P1Q1+ P2Q2 = Y
expenditure = income

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19
Q

Preference

A

greater liking for one alternative over another

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20
Q

real income

A

income expressed as quantity of goods you can afford to buy

Q1 + (P2/P1)Q2 = Y/P1

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21
Q

Relative Price

A

price of one good divided by price of other good

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22
Q

how does a change in price effect budget line

A

changes slope

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23
Q

how does change in income change budget line

A

brings parallel shift

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24
Q

indifference curve

A

measures utility, shows combinations of goods where consumer is indifferent

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25
Q

Marginal Rate of Substitution

A

measures rate at which person is willing to give up good y to get an additional unit of good x

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26
Q

when is MRS high

A

when indifference curve is steep

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27
Q

when is MRS low

A

when indifference curve is relatively flate

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28
Q

how do you calculate MRS

A

dividing change in good x by change in good y

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29
Q

what is the best affordable choice

A

highest attainable indifference curve
on budget line
has marginal rate of substitution equal to relative price

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30
Q

price effect

A

effect of change in price of good on quantity of good consumed

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31
Q

income effect

A

effect of change in income on buying plans; increase in income would allow consumers to move to higher indifference curve

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32
Q

Substitution effect

A

consuming more of cheaper good, less of expensive good. moving along same indifference curve

33
Q

if goods are perfect substitutes

A

indifference curve lines are linear

34
Q

if goods are perfect complements

A

indifference curves are right angles

35
Q

public good

A

product or service available to everyone in a society and can be used without diminishing the amount available to others

nonrival and nonexcludable

36
Q

excludable

A

only people who pay for it can enjoy its benefits

37
Q

nonexcludable

A

impossible or very costly to prevent anyone from benefiting from it

38
Q

rival

A

one person’s use of it decreases quantity available for someone else

39
Q

nonrival

A

if one person’s use of it does not decrease quantity available for someone else

40
Q

Private good

A

rival and excludable

41
Q

private good examples

A

food and drink
car
house

42
Q

common resources

A

nonexcludable and rival

43
Q

common resource examples

A

fish in ocean
atmosphere
national parks

44
Q

natural monopoly goods

A

nonrival and excludable

45
Q

natural monopoly goods example

A

internet
cable tv
bridge or tunnel

46
Q

public goods

A

nonexcludable and nonrival

47
Q

public good examples

A

national defense
the law
air traffic control

48
Q

public choice

A

decision that has consequences for many people and society

ex. decisions by politicl leaders about price and quantity regulation, taxes

49
Q

why do governments exist

A
  1. establish and maintain property rights
  2. provide nonmarket mechanisms for allocating scarce resources
  3. implement arrangements that redistribute income and wealth
50
Q

government failure

A

situation where government actions lead to inefficiency

51
Q

political marketplace

A

Supply: politicans and bureaucrats
Demand: voters and firms

voters express demand via votes and campaign contributions
politicians express supply with proposals
bureaucrats try to get biggest possible budget
voters and firms pay taxes

52
Q

why are public goods overprovisioned

A

when rationality of uninformed voters and special interest groups is taken into account

53
Q

free rider problem

A

absence of an incentive for people to pay for what they consume.
free rider enjoys benefits of good or service without paying for it

54
Q

value of private good

A

max amount person is willing to pay for one more unit

55
Q

value of public good

A

max amount all people are willing to pay for one more unit

56
Q

how do you calculate marginal social benefit

A

sum of all marginal benefits of all individuals at each quantity of good provided

57
Q

inefficient private provision

A

if private firm tried to produce and sell public good, almost no one would buy it

58
Q

efficient public provision

A

government can tax to make sure we pay, to overcome free rider problem

59
Q

principle of minimum differentiation

A

tendency for competitors to make themselves similar so as to appeal to max number of clients

60
Q

rational ignorance

A

decision by voters to not acquire info about a policy or provision of public good because cost of doing so exceeds expected benefit

61
Q

why is government involved in healthcare

A

it would be underprovided and unfairly distributed if not

62
Q

why does government get involved in education

A

brings external benefits

63
Q

why do failures exist in market for healthcare

A
  1. underestimate benefit
  2. underestimate future needs
  3. can’t affod
64
Q

externality

A

cost or benefit that arises from production and falls on someone else

negative -> imposes a cost
Positive -> creates a benefit

65
Q

private cost

A

borne by producer of good or service

66
Q

different types of externalities

A

negative production externalities
positive production externalities
negative consumption externalities
positive consumption externalities

67
Q

marginal private cost

A

private cost of producing one more unit

68
Q

marginal external cost

A

cost of producing one more unit that falls on someone else

69
Q

Marginal social cost

A

marginal cost incurred by entire society

MSC = MC + Marginal external cost

70
Q

property rights

A

legally established titles to ownership, use, and disposal of factors of production and goods and services that are enforceable in courts

71
Q

coase theorem

A

if property rights exist, only a small number of parties are involved, and transaction costs are low -> private transactions are efficient

72
Q

what are potential ways government mitigates pollution

A

establishing property rights -> confront producers with costs of their actions and providing incentives to allocate resources efficiently

mandating clean technology

tax or cap and trade

73
Q

Taxes to mitigate pollution

A

set a tax equal to marginal external cost

MC + tax = MSC -> Pigovian Tax

74
Q

Cap and trade to mitigate pollution

A

placing upper limit and then giving permits to those who make more pollution than permitted

75
Q

tragedy of the commons

A

overuse of common resource that arises when users have no incentive to conserve it and use it sustainably

76
Q

abatent technology

A

production technology that reduces or prevents pollution

77
Q

What are marginal social benefits in the context of positive externalities?

A

Marginal social benefit is the marginal benefit enjoyed by the entire society. It is the sum of marginal private benefit and marginal external benefit

78
Q

Why are some communities disproportionately exposed to pollution?

A

Communities might be disproportionately exposed to pollution because of:
Disproportionate siting: taste based discrimination, firms want to protect white population, or local economic conditions
Coming to the nuisance: lower income/minority households demonstrate a lower willingness to pay for environmental quality
Political economy and government: lax governmental enforcement, lower levels of voting, regulatory capture from polluting firms.

Hon 202 (2 decks)

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