ECON 200 Midterm #1 - Chapters 1-5

Scarcity

situation in which unlimited wants exceed the limited resources available to fulfill those wants

Rationality

using all available info to achieve one’s goals

Opportunity Costs

true cost of choice is the value you could have gained by choosing the next best alternative

Marginal Cost (MC) and Marginal Benefit (MB)

the additional cost or benefit associated with a small amount extra of some action

Incentive

An economic reward or punishment, which influences the benefits and costs of alternative courses of action.

Positive Analysis

the study of the way things are

Normative Analysis

the study of the way things should be

Microeconomics

study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices

Macroeconomics

the study of the economy as a whole, including inflation, unemployment, and economic growth

Econometrics

the study of statistics as used in economics

GDP per Capita

measure of total goods and services produced in a country (GDP), which is then divided by population

Disposable Income

= market income + (plus) cash transfers - (minus) direct taxes

Real GDP

measure of the quantity of goods and services purchased accounting for inflation and price changes

Purchasing Power Parity (PPP)

common set of prices. idea is to achieve quantity in real purchasing power

Capitalism

economic system characterized by a particular combo of institutions

Economic System

organizes production and distribution of goods and services in an economy

Institutions

A set of laws and informal rules that regulate social interactions among people, and between people and the biosphere; sometimes also termed ‘the rules of the game’

Capital Goods

equipments, buildings, and other durable inputs used in producing goods and services

Markets

means of transferring goods or services from one person to another

Ownership

right to use and exclude others from the use of something and the right to sell something that is owned

Economies of Scale

producing a large number of units of some good is often more cost-effective than producing a smaller number

Absolute Advantage

if input used to produce a good are less than some other person

comparative advantage

if the cost of producing an additional unit of a good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods

A Model of Decision Making

assumes that decision makers will choose (from a range of options) the option that gives them the most net benefit

Net Benefit

= benefit - (minus) total costs incurred

Economic Cost

= direct costs incurred by choosing an action + (plus) opportunity cost

Economic Rent

= net benefit from option taken - (minus) opportunity cost

Technology

process that uses a set of inputs, including materials, machinery, and labor to product an output

Specialization

divison of labor (people do what they are better at)

Production Function

relationship between inputs and outputs produced

Democracy

political system defined by individual rights to freedom of speech, assembly, etc. and fair elections where eligible adults can vote where loser leaves office

Factors of Production

inputs into the production process (land, labor, capital)

Constant Returns to Scale

if firm doubles all inputs, outputs are doubled as well

Cost

= (Wage)(N) + (Price)(M)

Iso-Cost Line

shows all combinations of inputs that cost the same

Slope of Iso-Cost Line

= (-Wage)/(Price)

Innovation Rent

additional profit a firm earns when they adopt a new technology

equation: = change in profit

Average Product of Labor (APL)

= (Output)/(# of Workers)

Equilibrium

self perpetuating situation. there is no tendency for the situation to change unless an external force for change is introduced

Endogenous Variables

variables whose valued are determined by relationships built into the model

Exogenous Variables

variables whose values are determined outside the model

Ceteris Paribus

holding all else equal

Tradeoffs

result of scarcity (giving up one thing in exchange for another)

Utility

A numerical indicator of the value that one places on an outcome. Outcomes with higher values will be chosen in preference to lower valued ones when both are feasible

Indifference Curve

Joins together all the combinations of goods that provide a given level of utility to the individual

Marginal Rate of Substitution (MRS)

The trade-off that a person is willing to make between two goods. At any point, it is the absolute value of the slope of the indifference curve (= |Slope of IC|).

Marginal Rate of Transformation (MRT)

The quantity of a good that must be sacrificed to acquire one additional unit of another good. At any point, it is the absolute value of the slope of the feasible frontier (= |Slope of FF|).

Consumption

= w(24-t) where w is wage and t is hours of free time

Optimal Choice

MRS = MRT

Malthusianism

Model that stated a sustained increase in income per capita would be impossible. Ultimately, a rise in productivity of labor would be offset by population growth.

Income Effect

The effect that an increase in income has on an individual’s demand for a good (the amount that the person chooses to buy) because it expands the feasible set of purchases. Typically depicted with a parallel shift of the feasible frontier.

Substitution Effect

Change in the consumption of the good that occurs because of the change in the good’s relative price. Typically depicted with a change in slope of the feasible frontier.

True or False: An individual’s ICs can never intersect.

True

Tragedy of the Commons

Occurs when resources that are not owned by anyone but can be depleted are overused.

Social Interactions

Situations in which there are two or more people and the actions taken by each person affect both their and the other’s outcome.

Game Theory

A branch of mathematics that studies strategic interactions, meaning situations in which each actor knows that the benefits they receive depend on the actions taken by all.

Player (Game Theory)

Who is interacting with whom

Strategy (Game Theory)

An action that a player may take

Payoff (Game Theory)

Utility earned by players for every possible set of strategies chosen (aka: outcomes of the game)

Best Response (Game Theory)

The strategy that will bring about the player’s most-preferred outcome, given the strategies adopted by the other players.

Dominant Strategy (Game Theory)

A strategy that yields the highest pay-off for the player, no matter what strategies the other players choose.

Nash Equilibrium

Players are responding the best simultaneously. No single player can do better by choosing another option.

Dominant Strategy Equilibrium

Nash equilibrium in which the strategies of all players are dominant stategies.

Allocation

A particular distribution of goods or other things of value to all participants.

Pareto Criterion

A way of comparing two allocations, A and B. It states that A is is an improvement on B if at least one person would be strictly better off with A than B and nobody would be worse off

Pareto Efficient

An allocation where there is no feasible alternative allocation in which at least one person would be better off, and nobody worse off.

Pareto Improvement

A change that benefits at least one person without making anyone else worse off.

Pareto Dominate, Pareto Dominant

Allocation A Pareto dominates allocation B if at least one person would be strictly better off with A than B, and nobody would be worse off.

Altruism

Social preference: a person who is willing to bear a cost to benefit somebody else is said to be altruistic.

Non-excludable Goods

A good where it is impossible to prevent anyone from having access to it.

Non-rival Goods

A good where one person’s use of the good does not diminish its benefit to others.

Public Goods

A good that is non-excludable and non-rival.

Reciprocity

A preference to be kind to or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind.

Power

The ability to do (and get) the things one wants in opposition to the intentions of others.

Reservation Option

When someone makes a choice amongst the available options in a particular transaction, this is their next best alternative option

Substantive Judgement of Fairness

Evaluation based on characteristics of the allocation itself (ex: allocations of income, wealth, happiness, freedom, etc.)

Procedural Judgements of Fairness

Evaluation based on how the allocation came about (ex. voluntary exchange, equal opportunity for economic advantage, deservingness)

Pareto Efficiency Curve

The set of all pareto efficient allocations

Endowments

Things individuals have that enable them to receive income (ex. financial wealth, physical assets, intellectual property, knowledge, skills, demographics, citizenship)

Market Income

Income from wages, salaries, self-employment, business, and investments

Gini Coefficient of Income

A measure of how income is distributed; lower the Gini Coefficient, the more equal distribution

= 0.5(average difference in income)/(average income)