Quiz 1 Flashcards
Weak assumption
- more reality
- closer to reality
Strong assumption
- not as realistic
- farther from reality
Diminishing marginal utility
- every successive utility consumed gives less satisfaction
- after eating 14 m&ms the 15th will be less satisfying to eat and so on with m&m #16, 17 etc.
Utility
Satisfaction
Rational economic behavior
- internally consistent and coherent behavior
- aka : all of the items/ideas/etc. within something are consistent with one another
Consumption
The act of deriving utility or satisfaction
Goods & services
- things we consume, or things people make/do
- goods can be stored
- services cannot be stored, a haircut is an example
Decision rule models how we make choices, captures a 2 step process to optimize resources
- how productive we are at making each of the various things —> productivity
- how much utility does each thing give us —> preferences
Discount
To diminish the value of something
Discount rate
- the price you pay for waiting, your “waiting fee”
- ex: the marshmallow experiment, kids that waited to eat the marshmallow were rewarded with a second marshmallow
Productivity (mp) and preferences (mu) equals
Value of marginal product
mp+mu=v
EPV
Expected
Present
Value
E- perception of risk
P- perception of time (low v. high discount rates)
V- how much satisfaction you feel (mu & mp)
Opportunity cost
The best forgone option, going to class or sleeping
Resource that is inevitably scarce for all individuals
TIME, scarce for all individuals, everyone makes choices based on the time they have Ex: using a certain amount of time to study for one class over another
Contract micro and macro
Micro: small, models individual choice
Macro: large, examines world economy as a whole
Ex: micro studies the trees of a forest, macro studies the entire forest
Ceteris Paribus
“Other things being equal”
Basically there may be complicating factors that we haven’t specifically assumed away, so whatever they are, we are assuming them away
Marginal utility
The specific amount of satisfaction a specific unit gives
Discounting the future
To diminish value, people want satisfaction sooner than later, the further into the future satisfaction will he realized, the more diminished value is
How can mind altering drugs affect ones choices
Higher discount rate, believes less risk in doing things
Specialization
Dividing up the labor across trades as well as within trades
Division of labor
Dividing the word that needs to be done among a group of people to increase complexity and productivity
Coordination mechanism
Allot for a fair trade, exchange between goods of surplus, a gain from trade
Comparative advantage
A person that is better than another person at both activities will choose the one that has the least cost (the job where they will lose the least)
3 roles of money
- Medium of exchange
- Store of value
- Unit of account
Division of labor limits
Division of labor is limited by the extent of the market
Commodity money
Functions as money but has value in and of themselves
Ex: gold
Fiat money
No commodity value, willingness of the people to accept it and the power of the government to enforce it
Supply line represents
Attitudes of suppliers, what quantity they bring to the market at each price, increased price leads to increased quantity
Circular flow of real things
Individuals supply factors to the factor market which are demanded by firms, firms supply products to the product market which are demanded by individuals
Circular flow of money
Individuals put money into the product market which is given to firms in revenue, firms pay costs to the factor market which is given to firms in revenue, firms pay costs to the factor market which is given to individuals in wages, rent and interest
Nice assumptions are called nice bc
The world does not actually operate like that
Nice assumptions
Assume that markets do their job and everyone has a fair race, or no market power
Pareto optimally
When no one can become better off without hurting someone else
Division of labor increases individual productivity by:
- increasing dexterity
- saving time in production
- encouraging inventiveness
Tradition coordination
“We’re going to do it this way because this is the way we’ve always done it”
Command coordination
“Were going to do it this way because I/we said so”
Liberal system of free markets
“The rules of the game are fair to all, and all play by the rules”
Commutative justice
The rules of the game are fair to all and all play by the rules
Distributive justice
Is the outcome of the markets system coordination fair/just to all
No market power
- equal access to markets
- equal access to information
No market failure
- markets form when and where they are needed
- markets function quickly and smoothly
Characteristics of good medium for money
- fairly fixed supply
- portable
- continuously divisible
- won’t spoil
