Econ 101 UW-Madison Final Exam

Income Effect

the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve

Substitution Effect

the change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution

Marginal Product of Labor

the increase in the amount of output from an additional unit of labor

Diminishing Marginal Product

the property whereby the marginal product of an input declines as the quantity of the input increases

Value of the Marginal Product

the marginal product of an input times the price of the output

Indifference Curve

a curve that shows consumption bundles that give the consumer the same level of satisfaction

Perfect Substitutes

two goods with straight-lined indifference curves

Perfect Complements

two goods with right-angled indifference curves

Utilitarianism

the political philosophy according to which the government should choose policies to maximize total utility of everyone

Utility

measure of happiness or satisfaction

Liberalism

the political philosophy according to which the government should choose policies deemed just, as evaluated by an impartial observer behind a "veil of ignorance"

Maximin Criterion

the claim that the government should aim to maximize the well-being of the worst-off person in society

Social Insurance

government policy aimed at protecting people against the risk of adverse events

Libertarianism

the political philosophy according to which the government should punish crimes and enforce voluntary agreements but not redistribute income

Natural Monopoly

market structure in which economies of scale exist over the entire size of the market

Price Discrimination

the business practice of selling the same good at different prices to different customers

Monopolistic Competiton

a market structure in which many firms sell products that are similar but not identical

Oligopoly

a market structure in which only a few sellers offer similar or identical products

Game Theory

the study of how people behave in strategic situations

Collusion

an agreement among firms in a market about quantities to produce or prices to charge

Cartel

a group of firms acting in unison

Nash Equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all other actors have chosen

Prisoners' Dilemma

a particular game between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

Dominant Strategy

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

Factors of Production

the inputs used to produce goods and services

Production Function

the relationship between the quantity of inputs used to make a good and the quantity of outputs of that good

Capital

the equipment and structures used to produce goods and services

Compensating Differential

a difference in wages that arises to offset the non-monetary characteristics of different jobs

Human Capital

the accumulation of investments in people, such as education and on-the-job training

Efficiency Wages

above-equilibrium wages paid by firms to increase worker productivity

In-Kind Transfers

transfers to the poor given in the form of goods and services rather than cash

Welfare

government programs that supplement the incomes of the needy

Negative Income Tax

a tax system that collects revenue from high-income households and gives subsidies to low-income households

Budget Constraint

the limit on the consumption bundles that a consumer can afford

Normal Good

a good for which an increase in income raises the quantity demanded

Inferior Good

a good for which an increase in income reduces the quantity demanded

Giffen Good

a good for which an increase in price raises the quantity demanded

Elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of it determinants

Price Elasticity of Demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed at the percentage change in quantity demanded over the percentage change in price

Price Elasticity of Supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good

Income Elasticity of Demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income

Cross-price Elasticity of Demand

a measure of how much the quantity demanded of one good responds to a change in price of another good

Welfare Economics

the study of how the allocation of resources affects economic well-being

Consumer Surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Cost

the value of everything a seller must give up to produce a good

Producer Surplus

the amount a seller is paid for a good minus the seller's cost of providing it

Efficiency

the property of a resource allocation of maximizing the total social surplus received by all members of society

Equality

the property of distributing economic prosperity uniformly among members of society

Deadweight Loss

a fall in total surplus that results from a market distortion, such as a tax

World Price

the price of a good that prevails in the world market for that good

Tariff

a tax on goods produced abroad and sold domestically

Externality

the uncompensated impact of one person's actions on the well-being of a bystander

Internalizing the Externality

altering incentives so that people take into account the external effects of their actions

Corrective Tax

a tax designed to induce private decision makers to take into account the social costs that arise from a negative externality

Coase Theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Transaction Costs

the costs that parties incur during the process of agreeing to and following through on a bargain

Competitive Market

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

Average Revenue

total revenue divided by the quantity sold

Marginal Revenue

the change in total revenue from an additional unit sold

Sunk Cost

a cost that has already been committed and cannot be recovered

When wages rise you have either

1. decreased hours of leisure and increased hours of labor

or

2. increased hours of leisure and decreased hours of labor

The Four Properties of Indifference Curves

1. higher indifference curves are preferred to lower ones

2. indifference curves are downward sloping

3. indifference curves do not cross

4. indifference curves are bowed outwards

Sources of Monopoly Power

1. sole ownership of a key resource

2. government intervention/regulation

3. natural monopoly

Box for Perfect Competition

P=MR price taking condition

MR=MC pi max condition

MC=P MSB=MSC efficiency condition

Box for Single Price Monopoly

P greater than MR

MR=MC

P greater than MC inefficiency

Monopolistic Competition

1. differentiated products; close, but not perfect substitutes

2. many firms- each with power over price

3. free entry and exit

Availability of Close Substitutes

goods with close substitutes have more elastic demand because it's easier for consumers to switch to the substitutes

Necessities vs. Luxuries

necessities tend to have inelastic demands whereas luxuries have elastic demands

Definition of the Market

narrowly defined markets tend to have more elastic demand than broad markets

Time Horizon

goods tend to have more elastic demand over longer periods of time

Price Elasticity of Demand

percentage change in quantity demanded over percentage change in price

Demand is elastic

when elasticity is greater than 1

Demand is inelastic

when elasticity is greater than 1

Demand is unit elastic

when elasticity is exactly one

The flatter the demand curve

the greater the price elasticity of demand

The steeper the demand curve

the smaller the elasticity of demand

Income Elasticity of Demand Equation

percentage change in quantity demanded over percentage change in income

Cross-price Elasticity of Demand Equation

percentage change in quantity demanded of good 1 over percentage change in price of good 2

Price Elasticity of Supply Equation

percentage change in quantity supplied over percentage change in price

Supply curve is perfectly inelastic if

supply is vertical

Supply curve is perfectly elastic if

supply is horizontal