Econ midterm 1

preferences

an economist imagines that a person has an ordered list of all the posisble bundles of goods in teh world; higher up on the list means more preferred

complements

pairs of goods that go well together

substitutes

a pair of goods that are wholly or partly interchangeable

normal good

if people were richer, they would choose more of this good

inferior good

if people were richer they would choose less of this good

substitution effect

if one good got cheaper relative to other options: the opportunity cost changed so you might choose that good more over others

income effect

you effectively got richer; the set of stuff you can afford is larger

ordinary good

if it was cheaper people would choose more of it

giffen good

if a good was cheaper people would choose less of it

strategic interaction

situations in which the outcome of your choice depends not on just what you choose, but what others choose; modeled by games

moves

what each player can do

• matrix/strategic form (matrix)

• extensive form (tree)

information

what each player knows when they take an action

payoffs

payoffs for each player as a function of every other player’s actions

• strategy: a complete contingent plan of action for each player

• strategy profile: a collection of strategies for all players

• solution concept: a strategy profile that is a “likely” way to play the game

nash equilibrium

mutual best response for each player

• each player’s strategy yields them the highest possible payoff given the strategy the other player used

prisoner’s dilemma

when a better outcome for both players exists, but attaining it would require trust and cooperation

dominant strategy

strategy that always earns higher payoff, regardless of what the other player chooses

production function

relates the amount of inputs to the maximum amount of output that can be made with those inputs

production function slope

the slope of the function is called the marginal product of the input, which is the rate at which one additional input will increase the output

law of diminishing returns

the output you get from each unit of input gets smaller as you add more of the input [SLDJFHDSL]

fixed costs (FC)

costs that a producer must pay regardless of how much output is produced (fixed in the short-run) 

ex. buying factory equipment

variable costs (VC)

costs that depend on how much output is produced

ex. delivery costs

total costs (TC)

fixed costs + variable costs

average cost (AC)

total costs divided by output produced; TC/Y (aka Average Total Cost)

average variable cost (AVC)

total variable costs divided by the amount you produce; VC/Y

marginal cost (MC)

the additional cost to the producer by producing one additional unit of a good or service

marginal revenue (MR)

the revenue added by producing one additional unit of a good or service

profit maximizing point

occurs where producers are producing at the quanitiy where MR = MC

returns to scale

a long-run concept (all inputs can be varied) about what happens when we scale up all inputs in the same proportion

decreasing returns to scale

if we increase all inputs by 10%, we get less than 10% more output (AC is rising as output is increased)

constant returns to scale

if we increase all inputs by 10%, we get exactly 10% more output (AC is constant as output increased)

increasing returns to scale

if we increase all inputs by 10%, we get more than 10% more output (AC is falling as output is increased)

assumptions of perfect competition: price-taking

each player in the market is sufficiently small that its quantity choices don’t influence the market price

assumptions of perfect competition: identical firms (the exact same goods)

firms are selling identical products

assumptions of perfect competition: perfect information

all players in the market know what the good is and its price

assumptions of perfect competition: free entry/exit in the long-run

firms are allowed to enter and leave the industry at will, given enough time to start up and wind down

profit maximization

in the model of perfect competition, profit maximization occurs where P=MC since each unit is sold so MR becomes P (bc firms have to be price takers)

in the long run:

all costs are variable

• producers will choose to “stick around” (stay in the industry) in the long run if: profits > AC

in the short run:

when at least one input must be used in a fixed amount

• producers can not just shut down and exit industry; the must continue to pay for fixed costs

• will “stick around” in the SF but leave in the LR if: AC > profits > AVC

counterfactuals

• What would happen if we’d done something differently?

• What if we’d used a different policy?

• How will things play out if we do this instead of that?