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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
Marginal Rate of Substitution
measures rate at which person is willing to give up good y to get an additional unit of good x
26
when is MRS high
when indifference curve is steep
27
when is MRS low
when indifference curve is relatively flate
28
how do you calculate MRS
dividing change in good x by change in good y
29
what is the best affordable choice
highest attainable indifference curve on budget line has marginal rate of substitution equal to relative price
30
price effect
effect of change in price of good on quantity of good consumed
31
income effect
effect of change in income on buying plans; increase in income would allow consumers to move to higher indifference curve
32
Substitution effect
consuming more of cheaper good, less of expensive good. moving along same indifference curve
33
if goods are perfect substitutes
indifference curve lines are linear
34
if goods are perfect complements
indifference curves are right angles
35
public good
product or service available to everyone in a society and can be used without diminishing the amount available to others nonrival and nonexcludable
36
excludable
only people who pay for it can enjoy its benefits
37
nonexcludable
impossible or very costly to prevent anyone from benefiting from it
38
rival
one person's use of it decreases quantity available for someone else
39
nonrival
if one person's use of it does not decrease quantity available for someone else
40
Private good
rival and excludable
41
private good examples
food and drink car house
42
common resources
nonexcludable and rival
43
common resource examples
fish in ocean atmosphere national parks
44
natural monopoly goods
nonrival and excludable
45
natural monopoly goods example
internet cable tv bridge or tunnel
46
public goods
nonexcludable and nonrival
47
public good examples
national defense the law air traffic control
48
public choice
decision that has consequences for many people and society ex. decisions by politicl leaders about price and quantity regulation, taxes
49
why do governments exist
1. establish and maintain property rights 2. provide nonmarket mechanisms for allocating scarce resources 3. implement arrangements that redistribute income and wealth
50
government failure
situation where government actions lead to inefficiency
51
political marketplace
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
why are public goods overprovisioned
when rationality of uninformed voters and special interest groups is taken into account
53
free rider problem
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
value of private good
max amount person is willing to pay for one more unit
55
value of public good
max amount all people are willing to pay for one more unit
56
how do you calculate marginal social benefit
sum of all marginal benefits of all individuals at each quantity of good provided
57
inefficient private provision
if private firm tried to produce and sell public good, almost no one would buy it
58
efficient public provision
government can tax to make sure we pay, to overcome free rider problem
59
principle of minimum differentiation
tendency for competitors to make themselves similar so as to appeal to max number of clients
60
rational ignorance
decision by voters to not acquire info about a policy or provision of public good because cost of doing so exceeds expected benefit
61
why is government involved in healthcare
it would be underprovided and unfairly distributed if not
62
why does government get involved in education
brings external benefits
63
why do failures exist in market for healthcare
1. underestimate benefit 2. underestimate future needs 3. can't affod
64
externality
cost or benefit that arises from production and falls on someone else negative -> imposes a cost Positive -> creates a benefit
65
private cost
borne by producer of good or service
66
different types of externalities
negative production externalities positive production externalities negative consumption externalities positive consumption externalities
67
marginal private cost
private cost of producing one more unit
68
marginal external cost
cost of producing one more unit that falls on someone else
69
Marginal social cost
marginal cost incurred by entire society MSC = MC + Marginal external cost
70
property rights
legally established titles to ownership, use, and disposal of factors of production and goods and services that are enforceable in courts
71
coase theorem
if property rights exist, only a small number of parties are involved, and transaction costs are low -> private transactions are efficient
72
what are potential ways government mitigates pollution
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
Taxes to mitigate pollution
set a tax equal to marginal external cost MC + tax = MSC -> Pigovian Tax
74
Cap and trade to mitigate pollution
placing upper limit and then giving permits to those who make more pollution than permitted
75
tragedy of the commons
overuse of common resource that arises when users have no incentive to conserve it and use it sustainably
76
abatent technology
production technology that reduces or prevents pollution
77
What are marginal social benefits in the context of positive externalities?
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
Why are some communities disproportionately exposed to pollution?
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 (3 decks)

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