modeling Flashcards
what makes a good model? (4)
- clearness
- identifies important relationships
- predicts accurately
- improves communication
ceteris paribus
holding everything else constant
incentives
rewards / punishments that affect the costs or benefits of taking one action as opposed to another.
3 ideas of economic modeling
- ceteris paribus
- incentives
- relative prices
relative prices
we often focus on ratios of things to compare different actions and explain individual choice.
trade off’s
we have constraints
production function
shows how inputs (work hours) translate into outputs (GPA), holding other factors constant (environment)
marginal product
if we change the input 1 unit, what happens to output. (at 4 hours of study)
diminishing marginal product
studying becomes less productive the more you study
opportunity costs
cost of engaging in one activity and not your next best alternative.
economic costs
monetary costs + subjective costs
economic rent
if the benefit from an action exceeds the economic costs you receive an economic rent.
feasible frontier
what is possible- shows the maximum output that can be received with a given amount of input
marginal rate of transformation (opportunity cost)
the trade offs an individual faces
what is the cost of transforming something to another thing’s one unit.
being under the frontier means…
not optimal or efficient- means having more of something without giving up another thing.
marginal rate of transformation in our case:
at point E, country buys 1 gun and 280 butters, and at point D country buys 2 guns and 240 butters. => MRT= 280 - 240 = 40 units of butter.
marginal rate of substitution
your preferences! the slope of the indifference curve.
expected utility
utility you gain if an actor chooses a particular outcome or takes a particular path
indifference curves
along that line, everything is indifferent (you don’t care if you get a 70 or a 80) the one in the top is preferred to the one in the bottom in a graph. - joint points that cannot be ordered.
what do indifference curves show?
they show all combinations that give the same utility
what does MRS represent?
MRS represents the trade offs an individual PREFERS to make - what trade off’s your cool with.
properties of indifference curves
- they slope downwards
- higher indifference curve correspond to higher utility levels. (between lines)
- they are smooth (there aren’t large fluctuations in preferences)
- indifference curve’s don’t cross (because all points on the lines that cross would be equivalent.)
- diminishing MRS: as you move to the right along an indifference curve, it becomes flatter (because we assume we don’t want to have all of one good) (if there was perfect substitutability it would be a flat line)
optimal choice
the utility maximizing choice is where the amount of one good the individual is WILLING to trade equals the ACTUAL trade off between two goods.
tangency
where MRT= MRS (the highest attainable indifference curve touches the frontier but don’t cross it)
what may increase the frontier?
technological progress - the new technology increases the marginal product of labor (1 hour used to give 3 things, now it gives 6 things )
Tversky and Khanneman
a) you lose 10 dollars at restaurant
b) you lose the ticket which costed you 10 dollars.
people spent the second 20 dollars in a. (humans not acting like economists)
sunk cost
staying in the movie when you hate it.
humans not acting like economists
“thinking at the margins”
focus on your future utility - consider opportunity costs (what is my other option, and does that one have more benefits)
