week 1 Flashcards
definition of economics
finite resources are insufficient to satisfy all humans wants and needs
laissez faire
no need for gevernment intervention. Competitive markts allocate scarce resources most efficiently
competitive markets
allocate scarce resources most efficiently
market test
if what individuals are willing to pay exceeds the costs of production
market failure
Market failure refers to the inefficient allocation of resources that occurs when individuals acting in rational self-interest produce a sub-optimal outcome
economic policy
Actions that are intended to influence the way in which markets
allocate finite resources
micro economic theory
relating to the branch of economics concerned with single factors and the effects of individual decisions.
rational consumers (Homo Oeconomicus)
Weigh the costs and benefits of each possibility whenever they must
make a choice in pursuit of their own self-interest
profit-maximizing firms
assumes that the goal of a company is to make the highest profits possible
rational choice
Each person tries to choose the best alternative available to him or her (optimization principle)
equilibrium
Market price adjusts until quantity demanded equals quantity supplied
reservation price
person’s maximum willingness to pay for something
demand curve
a graph that shows the relationship between the price of a good or service and the quantity demanded within a specified time frame
quantity
the amount of something
supply curve
a graph that represents the direct relationship between quantity supplied and prices
supply shift
a change in the quantity supplied at every price
demand shift
at any price (and at every price), the quantity demanded will be different than it was before
monopolist
a person or business that has monopoly
trade-off
a balance achieved between two desirable but incompatible features; a compromise.
perfect competition
a theoretical market structure in which there are no monolpolies
pareto efficienct
if it is impossible to change the
allocation to make one party better off without making another party
worse off
pareto improvement
if we can find a way to make some people better off without making anybody else worse off
pareto inefficient
there remain unrealized mutual
gains-to-trade
competititive equilibrium
achieved when profit-maximizing producers and utility-maximizing consumers settle on a price that suits all parties.
consumption choice set
the collection of all consumption choices available to the consumer
budget constraint
p1x1 + p2x2 = m
- p1x1: amount of money spent on good 1
- p2x2: amount of money spent on good 2
consumption bundle
X(x1, x2)
- X denotes the bundle composed of good 1 and good 2
- x1: how much the consumer consumes of good 1
- x2: how much the consumer consumes of good 2
budget set
The set of affordable consumption bundles
budget line
x2 = (m/p2) - (p1/p2)*x1
slope of the budget line
-p1/p2
it measures the rate at which the market is willing to substitute good
1 for good 2
opportunity cost
the potential benefits that an individual, invester of business misses out on when choosing one alternative over another
value tax (VAT)
t increases all prices of a given percentage
subsidies
the opposite of taxes and can also be given based on quantity
consumed or on the value
strict preference of bundle
(x1, x2) ≻ (y1, y2)
⇒ Consumer wants the x-bundle rather than the y-bundle
indifference of bundle
(x1, x2) ∼ (y1, y2)
⇒ Consumer would be just as satisfied consuming the bundle
(x1, x2) as they would be consuming the other bundle (y1, y2)
weak preference of bundle
(x1, x2) ⪰ (y1, y2)
⇒ If the consumer prefers or is indifferent between the two bundles
ordinal
they state only the order in which bundles are preferred
axioms of consumer theory: preferences are complete
- it assumes that any two bundles can be compared
- Given any x-bundle and any y-bundle, we assume that
(x1, x2) ⪰ (y1, y2) or (y1, y2) ⪰ (x1, x2), or both in which case the
consumer is indifferent between the two bundles
axioms of consumer theory: preferences are reflexive
Any bundle is always at least as preferred as itself: (x1, x2) ⪰ (x1, x2)
axioms of consumer theory: preferences are transitive
Any bundle is always at least as preferred as itself: (x1, x2) ⪰ (x1, x2)
indifference curve (IC)
a graphical representation of the various combinations of two goods with which a consumer is equally satisfied
perfect substitutes in IC
two goods are perfect substitutes if the consumer is willing to substitute one good for the other at a constant rate. IC has constant slope
perfect complements in IC
goods that are always consumed together in fixed proportions. IC is L-shaped
monotonic
More of any commodity is always preferred
convex
ssumes that averages are preferred to extremes
marginal rate of substitution (MRS)
the slope of an indifference curve at a particular point. Slope = ∆x2/∆x1
