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Econ 101 > Unit 2 - Behavioral Economics and Labor Markets > Flashcards

Unit 2 - Behavioral Economics and Labor Markets Flashcards

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1
Q

“benevolent social planner”

A

would pick Qeqm over any other Q and gov’t should not intervene

caveat: perfect competition & no market failure assumed

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2
Q

slope of BC

A

reflects rate at which you can trade between 2 goods, slope is constant

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3
Q

slope of IC

A

rate at which you are willing to trade between 2 goods, slope is not constant

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4
Q

draw the best bundle change when BC changes

A
  1. original BC (start with intercepts)
  2. draw new BC
  3. is there an income effect?
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5
Q

step 2 - draw new BC

A

increase income -> parallel shift
increase price of M –> rotation

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6
Q

is there an income effect?

A

if you can afford more bundles than before (richer) or fewer (poorer)

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7
Q

richer income effect

A

more of normal goods and less of inferior goods

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8
Q

poorer income effect

A

less of normal goods and more of inferior goods

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9
Q

substitution effect

A

occurs when there is a change in relative prices

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10
Q

assumption to increase consumption

A

of goods that become cheaper

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11
Q

“Homo Economicus”

A

Rational, forward-looking, utility-maximizing consumer;
weighs costs and benefits when making decisions

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12
Q

Behavioral economics

A

Subfield of economics that incorporates insights from
psychology into human behavior to explain economic
decision-making

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13
Q

Why might people not act like HE?

A

People rely on automatic system not reflective system
Limited rationality
Limited willpower

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14
Q

limited rationality

A

people do not have unlimited time and processing capacity; use rules of thumb

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15
Q

limited willpower

A

people know optimal outcome but fail to achieve it because of self-control problems

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16
Q

Anchoring bias

A

relying too much on an early, irrelevant piece of information

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17
Q

Availability bias

A

relying too much on information that comes to mind easily (e.g., because an event happened
recently or had an emotional impact)

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18
Q

Representativeness heuristic

A

making a judgement about how likely it is that A belongs to category B based on how similar A is to our image/stereotype of B

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19
Q

Optimism bias

A

Overestimating the probability of experiencing positive events and underestimating probability of negative events

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20
Q

Loss aversion

A

Evaluating utility based on your reference point – did you
gain or lose, relative to your earlier position – and not only
on the ultimate outcome

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21
Q

Status quo bias

A

Putting too much weight on current situation

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22
Q

Framing

A

Being influenced by way in which information is presented (e.g., equivalent information treated differently depending on what aspects are emphasized)

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23
Q

To an economist, what is the optimal choice?

A

maximizes utility, given your preferences and the constraints you face (e.g., HE’s choice)
* People acting as HE can make different choices

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24
Q

How do we know their choices are not optimal?

A

Many lab studies in psych/behavioral econ validate biases
Many studies of people’s real choices find behavior
inconsistent with HE

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25
Q

More likely to struggle to make an optimal choice when decisions:

A

Involve tradeoffs between present costs and future
benefits (limited willpower)
* Involve complicated calculations (limited rationality)
* Are made infrequently
* Offer little feedback
* Are unclear as to consequences of the choice

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26
Q

nudge

A

can be used to encourage individuals to make an optimal decision
an intervention meant to change behavior without restricting choices or changing financial
incentives
Examples: defaults

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27
Q

Pros of nudges

A

Can be powerful tool to improve decisions at little/no cost
* Does not limit choices

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28
Q

Cons of nudges

A

What is optimal? Design based on typical person, but could move some people away from their best choice
* Paternalistic government may bother some people

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29
Q

How to pick the best Q?

A
  1. maximize profits
  2. set MR = MC
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30
Q

profits

A

TR - TC

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31
Q

TR

A

P*Q

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32
Q

perfect competition

A

many small buyers & sellers
price takers
homogenous good

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33
Q

marginal revenue (MR)

A

additional revenue from selling 1 more unit of good
change in profits

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34
Q

Why does MR = P?

A

perfect competition

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35
Q

Marginal cost

A

change in total cost

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36
Q

profits formula

A

Q(P-ATC)

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37
Q

where does the firm produce?

A

where MR = MC
may not be the same Q as min ATC

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38
Q

What if firm is making losses?

A

still in business b/c they will not shut down immediately
smallest possible loss
can break even to cover input costs (workers, CELL, opportunity cost of alternative jobs/salaries)

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39
Q

key features of firm’s production decision in short run

A

P < AVC –> immediate short run shutdown
AVC < P < ATC

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40
Q

accountants

A

profits + Explicit cost = TR

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41
Q

economists

A

profits + implicit costs + explicit costs = TR

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42
Q

firm’s supply curve

A

MC curve above min ATC
S curve slopes up

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43
Q

Why does S curve slope up?

A

S = MC (above min ATC) and MC is using beyond same point

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44
Q

P > ATC

A

firm makes profits in SR

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45
Q

AVC<P<ATC

A

firm is making losses but still produce in short run (Q* > 0)

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46
Q

P<AVC

A

shut down immediately/Q* = 0

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47
Q

Short run S curve

A

MC above min AVC
above min AVC b/c below min AVC is shut down point

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48
Q

Why is the MC curve = S?

A

P his MC curve, setting MR = MC (check that P > AVC)
also means P = MC b/c the firm is a price taker

49
Q

Firm is making profits

A

P>ATC
new firms will enter
small business chooses best Q* given price
new firms enter: S shifts out (price decreases)
entry continues until profits=0, P=min ATC

50
Q

firm LR competitive equilibrium

A

profits = 0

51
Q

Why are firms iwlling to be in business if profit = 0?

A

ECONOMIC profits = 0
profit = TR - TC
TR = TC
TR = explicit & implicit costs

can earn enough to cover explicit & implicit, can pay yoruself same amount as next best opportunity

52
Q

only profits can only exist in short run (breaking even)

A

many firms chasing profit

53
Q

What is the LR market S curve?

A

perfeclty elastic S
1 P1, any Q
exists b/c # of firms adjust from A –> C (no other P can exist)

54
Q

Long run PC firm

A

P = min ATC –> good produced at min cost in LR
consumer side: good gets produced as cheap as possible, pay less than monopoly (prefer LR equilibrium)

55
Q

price taker in labor market

A

PC firm

56
Q

VMPL

A

value of MPL = P x MPL

57
Q

production function

A

total product

58
Q

Ho mw many workers should firm hire?

A

to the point where wage = 1 /MPC

59
Q

where is firm’s D ofor labor?

A

= 1/MPC

60
Q

market D for labor

A

horizontal sum of indivdiual firms’ D curves

61
Q

causes for market D for labor shifts?

A

D shifts or MPL changes

62
Q

change in P of output

A

D shifts out

63
Q

tech change that increases MPL

A

D shifts out

64
Q

why do wages increase over time?

A

tech change –> shift out of D –> increase wage

65
Q

TC

A

TFC + TVC

66
Q

AFC

A

TFC/Q

67
Q

AVC

A

TVC/Q

68
Q

ATC

A

TC/Q

69
Q

MC

A

change in TC/change in Q

70
Q

where the firm continues to produce in the short run despite losses

A

AVC<P<ATC

71
Q

firm shuts down immediately

A

at the Q where the smallest negative loss is made
price isn’t even sufficient to cover costs

72
Q

MC curve

A

tells us what quantity the firm wants to produce at any given price

73
Q

Fixed costs

A

do not depend on Q (must pay even if Q=0)

74
Q

Variable costs

A

depend on the number of units produced. need to buy more inputs to make more outputs.

75
Q

Implicit costs

A

require the use of resources the firm owns rather than an outlay of cash. don’t need to pay for it like other costs

76
Q

Explicit costs

A

require an outlay of money by the firm

77
Q

A perfectly competitive market

A
  1. many small buyers and sellers
  2. homogenous good
  3. price takers
78
Q

Long-run competitive equilibrium

A

where P=min ATC and economic
profits=0; there are no economic profits drawing new firms into the industry or economic losses leading firms to leave

79
Q

monopoly

A

market structure w/ only one seller

80
Q

monopolistic

A

the one firm

81
Q

monopsony

A

market structure w/ only 1 buyer
use power to get a lower price

82
Q

sources of monopoly

A

in PC, SR profits –> new firms enter –> S curve shifts out, P decreases –> LR competitive equilibrium, P = min ATC

83
Q

barriers to entry

A

natural monopoly/economies of scale
patent/copyright
ownership of key input
gov’t-granted franchise

84
Q

natural monopoly/economies of scale

A

large fixed costs
ex: tech giants, utilities/power, water, electricity

85
Q

patent/copyright

A

period of exclusive use of tech
ex: Rx drug

86
Q

ownership of key input

A

ex: diamonds (De Bears owns 85%)

87
Q

gov’t-granted franchise

A

ex: grueling license process in India, gov’t licenses for radio frequencies/other goods & services (otherwise will be shut down)

88
Q

PC firm goal

A

max profits
by: setting MR = MC
MR = P (price-takers)

89
Q

monopolist

A

goal: max profits
by: setting MR = MC. MR < MC decreases profits by making that unit. If MR > MC, increase profits by making that unit.
price-maker

90
Q

calculate P and TR from D curve

A

Profits = Q(P-ATC)
TC must be given

91
Q

TR

A

P X Q

92
Q

MR

A

change in TR as Q increases by 1 unit

93
Q

monopolist

A

satisfies whole market demand
MR<P

94
Q

What is best Q for PC firm?

A

D curve doesn’t belong on graph
Q* where MC interesects MR
MC upward sloping parabola-like, MR horizontal

95
Q

What is best Q for monopoly?

A

D curve belongs on graph b/c satisfy whole market D
MC upward sloping parabola-like, D downward sloping, MR goes into negative region slightly
set MR = MC –> Qm
go up to D –> Pm

96
Q

monopolist prices

A

are constrained by D
monopolist picks (p, q) point on D curve to max profits

97
Q

PC firm - market S & D

A

determine P, pick best Q based on MR = P

98
Q

monopoly versus PC outcomes

A

Pm > Ppc
Qm< Qpc

99
Q

where S goes in the end

A

Qpc

100
Q

Why don’t monopolists care about social surplus?

A

they want max profit

101
Q

are there profits in PC?

A

yes in short run depending on P
SR profits –> entry of new firms –> S shifts out –> P decreases –> profits go to 0 (economic profits)

102
Q

P=min ATC

A

good produced at min cost and that’s what consumers pay

103
Q

What about monopoly?

A

can be profits in short & long run b/c barriers to entry

104
Q

ATC above P

A

per unit loss

105
Q

P = MC

A

min ATC in LR

106
Q

Why we don’t like monopoly

A

consumers pay markup and it doesn’t get competed away
DWL
not getting to min ATC

107
Q

Government responses to monopoly?

A

antitrust policy, regulate prices of monopolist, require firms to offer access to their critical infrastructure network (sell space in pipeline/etc)

108
Q

antitrust policy

A

prevent monopolization of industry –> block mergers if make market too concentrated
sue firms for anti-competitive behavior (as defined by laws like Sherman Act/case law)

109
Q

regulate prices of monopolist

A

ex: utilities (rate-setting process)
natural monopoly (large fixed costs)
gov’t try to set P @ Ppc –> monopolist is a price taker –> pick Qpc

110
Q

oligopoly

A

homogenous good
few large firms
barriers to entry

111
Q

limits to P monopolists can charge

A

they couldn’t charge a P so high that the Qd would be 0 (that would make no sense). In practice, the best P is determined by picking Q where MR=MC and then going up to the P on the D curve at that point, and this will be a higher P than in the perfectly competitive market

112
Q

PC

A

many small firms, homogenous goods, no barriers to entry, no LR profits

113
Q

monopoly

A

1 seller, homogenous goods from 1 firm, barriers to entry, LR profits

114
Q

oligopoly

A

few large firms, homogenous goods (i.e. oil), barriers to entry, LR profits depends on competition

115
Q

monopolistic competition

A

many sellers (esp in long run), no homogenous goods, no barriers to entry, no LR profits

116
Q

market outcome with many competitors under PC

A

1 firm develops new product, have monopoly in SR. P = MC. P>min ATC in LR.

117
Q

market outcome with many competitors under monopolistic competition

A

1 firm develops new product, have monopoly in SR. P>MC, P>min ATC

118
Q

market outcome w/ many competitors (long run)

A

entry from competing firms w/ small products
shift in of D for original firm (still monopolist –> only few w/ their specific product)
entry continues only until profits = 0

Econ 101 (5 decks)

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