PART A Flashcards
Completeness
A consumer either prefers one of the bundles to the other, or is indifferent between the two bundles
Transitivity
If consumer prefers bundle A to B, and prefers B to C, then consumer should prefer bundle A to C. Similarly if indifferent
Monotonicity
Any marginal increase in the quantity of a good generates an increase in a consumer’s utility.
More is better!
Indifference Curve
Represents different levels of utility a consumer derives from consuming different combinations of goods.
Budget Constraint
Possible combinations of two goods that can be purchased given a specific budget
MRS
Gradient of IC. Maximum amount of one good the consumer would be willing to sacrifice in order to obtain one more unit of another good.
MRS = -MUx/MUy
MRT
Gradient of BC. The amount of one good that must be forgone to produce an additional unit of another good while keeping the overall level of production constant.
MRT = -Px/Py
MRTP
Rate at which individuals value present consumption compared to future consumption. It represents the trade-off between consuming resources now versus saving or investing them for future consumption.
Gradient of IC between C1 and C2 as axis
MRTS
rate at which one input can be substituted for another in the production process while keeping the level of output constant. MPL/MPK
Gradient of Isoquant with Labour (Y axis) and Capital on axis
Interior Solution
Interior solutions exhibit optimal quantities that are positive for both goods,
At such a point, notice the following condition holds because the slope of the IC equals the slope of the BC.
Corner Solution
Sometimes, an interior solution may not exist because there is no possible point where MRS=MRT
Highest IC the consumer can reach where the optimal quantity of one of the goods is zero. This will occur when the MRS is greater or less than the MRT.
Utility possibilities frontier
Shows combinations of consumer A and B utility that correspond to contract curve. For a certain level of persons A utility what is the max utility B can have
Normal good
∂𝑞Y/∂M > 0
Inferior good
∂𝑞Y/∂M < 0
Substitutes
𝜕𝑞X /𝜕𝑝𝑌 > 0
Complements
𝜕𝑞𝑋 /𝜕𝑝𝑌< 0
Independent goods
𝜕𝑞𝑋 /𝜕𝑝𝑌= 0
Ordinary good
𝜕𝑞𝑌 /𝜕𝑝𝑌< 0
Giffen good
𝜕𝑞𝑌 /𝜕𝑝𝑌> 0
Income elasticity
% change in qy/ % change in M
Cross price elasticity
% change in qx / % change in px
Substitution effect
The change in demand, holding the other price and utility constant. Purely the impact of a change in relative prices.
Compensating variation
Change in income that the consumer would need to restore his original utility.
Equivalent variation
Change in income that would provide an equivalent change to the consumer’s utility.
Risk averse (diagram)
Choose expected value over taking the gamble
Laffer curve
There is an optimal tax rate that maximizes government revenue, beyond which further increases in tax rates can actually lead to a decrease in revenue.
Isoquants
Possible combinations of factors (labour and capital) that, when used efficiently, generate a given level of output. Returns to labour and capital diminishing (convex). How much extra labour required to give up 1 unit of capital. This increases the more labour/less capital you have
Isocost
Possible combinations of inputs that constitute a given total cost, C .
For a wage rate, w, and capital rental rate, r, an isocost line, can be described by C = wL + rK.
Shutdown rules (diagram)
Shutdown Rule (in the LR)
In the LR, firms do not need to incur any fixed capital costs. Shutdown if profits are negative, if revenues are less than total costs:
pq < C(q) …. or if we divide by q: p < AC(q)
Shutdown Rules (in the SR)
In the SR however, the firm has to pay its fixed capital costs, F, regardless of its output choice. Shut down if
pq < VC(q)
or if we divide by q:
p < AVC(q)
Price floor
Government-imposed minimum price set above the equilibrium price in a market. It is a form of price control that aims to ensure that the price of a good or service does not fall below a certain level. The intention behind implementing a price floor is typically to protect producers or workers in industries where the market price may be considered too low to sustain their livelihoods or operations.
Price ceiling
Government-imposed maximum price set below the equilibrium price in a market. It is a form of price control that aims to limit the price that can be charged for a particular good or service. The intention behind implementing a price ceiling is typically to protect consumers from high prices or to ensure affordability in essential goods or services.
Ad valorem tax
% of the item’s value.
Specific tax
fixed value based on quantity
Natural Monopoly (diagram)
A single firm can produce and supply a good or service more efficiently and at a lower cost than multiple competing firms. It arises when economies of scale are so significant that they create a high barrier to entry, making it economically impractical for other firms to enter the market and compete effectively.
Perfect PD
Under perfect price discrimination, the firm charges each consumer a price that is exactly equal to the maximum he/she is willing to pay. 0 CS
Multimarket PD
Firms divide potential customers into two or more groups (based on some easily observable characteristic, demand elasticity matters) and set a different price for each group.
Quantity PD
Price varies with quantity purchased, but each
customer faces the same nonlinear pricing schedule.
Negative Externality
A negative externality is a concept in economics that refers to a cost or impact imposed on a third party who is not directly involved in a transaction or activity. It occurs when the production or consumption of a good or service causes spillover effects that result in harm or costs to individuals or society at large.
