Economics Lecture Notes: Biases, Market Structures, Game Theory, and Key Concepts

A comprehensive set of flashcards covering biases in decision making, market structure concepts (monopolistic competition, oligopoly, dominant firm), game theory basics (Nash equilibrium, Prisoner’s Dilemma), information economics (asymmetry, adverse/moral hazards), and macro/monetary concepts (Phillips curve, central bank independence).

What is Availability bias?

Relying on knowledge that is readily available rather than examining other alternatives, often preferring the simplest answer.

What is Representativeness bias (regression to the mean)?

The tendency for current form or outcomes to revert toward the average after a period of exceptional performance, giving the illusion of a trend where none exists.

What is Framing bias?

A bias where decisions are influenced by how information is presented or framed rather than by the information itself.

What does Prospect theory say about the value function?

Defined over changes in wealth; the function is steeper for losses than for gains, implying loss aversion.

What is the Endowment effect?

Ownership increases the perceived value of an object, making people value what they own more than what they do not.

What is Anchoring bias?

The tendency to rely too heavily on the first piece of information encountered (the anchor) when making decisions.

What does the Weber-Fechner Law describe?

Perception of changes in intensity is relative to the initial level, not absolute, causing diminishing sensitivity to changes.

What is Loss aversion?

The tendency to prefer avoiding losses over acquiring equivalent gains, contributing to risk-averse behavior.

What is the Sunk-cost fallacy?

Continuing an endeavor because of already invested resources, rather than based on future benefits.

What is the Law of small numbers?

The tendency to draw broad conclusions from small sample sizes.

What is Present bias?

Overvaluing immediate rewards at the expense of future benefits.

What is fungibility of money?

Money from different sources is treated differently (e.g., €500 saved vs. €500 in a paycheck) in decision making.

What is Market power?

The ability to raise price without losing all customers; stronger with inelastic demand.

What characterizes Monopolistic competition?

Many firms with free entry and exit, differentiated products, and competition on price, quality, and marketing.

What are the four key implications of Monopolistic Competition?

Small market share; firms ignore others; collusion is unlikely; free entry and exit.

What is PMQ (Profit-Maximising Quantity)?

The quantity where marginal revenue equals marginal cost (MR = MC).

How is price determined in a PMQ framework?

From the firm's demand curve, yielding the highest price at the PMQ.

What is the HHI index?

A concentration measure calculated as the sum of squared market shares; >1000 indicates concentration, >2000 indicates high concentration.

What is a kinked demand curve?

A model where price increases may not be followed by rivals, but price decreases are followed; above P* demand is elastic, below it is inelastic.

What is the Dominant firm model?

One firm has a large cost advantage and sets the price; other firms are price takers.

What is a Nash equilibrium?

A situation where each player chooses the best response given the actions of the others, with no incentive to deviate.

What is the Prisoner’s Dilemma?

A game illustrating how rational individuals may fail to achieve the optimal collective outcome due to self-interest.

What is a Dominated strategy?

A strategy that is always worse than another strategy, irrespective of the opponent’s actions.

What is a Dominant strategy?

A strategy that yields a higher payoff regardless of the other players’ actions.

What is a Sequential game?

A game represented by a game tree showing the order of moves and possible outcomes.

What is Expected Utility?

The probability-weighted average of utilities across possible outcomes.

What are Risk preferences: risk aversion, risk neutrality, and risk loving?

Risk-averse prefers sure outcomes; risk-neutral is indifferent; risk-loving prefers risk for higher potential payoff.

What is Information asymmetry?

One party has more or better information than another, enabling exploitation and market failures.

What is Moral hazard?

Hidden actions by the informed party that raise costs or risk for others because those costs are insured or covered.

What is Adverse selection?

Hidden information before a contract leads to the selection of low-quality goods or risks, such as lemons in insurance markets.

What is Market clearing?

Prices adjust to equate supply and demand in a market.

What is Sticky wages?

Wages that do not adjust quickly to changes in economic conditions, leading to price/wage rigidity.

What is the Phillips curve?

The relationship between inflation and unemployment; in the long run it reflects the natural rate of unemployment, with expectations shifting the curve.

Why should central banks be independent?

To reduce time inconsistency and inflation bias; historical models like the Bundesbank inspired the ECB’s independence.