Midterm Chapters 1-10 Microeconomics

conspicious consumption

the consumption of goods not for one's direct pleasure, but simply to show off to others

income effect

the reduction in quantity demanded because price increases make us poorer

marginal utility

the satisfaction one gets from consuming one additional unit of a product above and beyond what one has consumed up to that point

principle of diminishing marginal utility

as you consume more of a good, after some point, the marginal utility receivede from each additional unit of a good decreases with each additional unit consumed, other things equal

principle of rational choice

spend your money on those goods that give you the most marginal utility (MU) per dollar

status quo bias

an individual's actions are very much influenced by what the current situation is, even when that reasonably does not seem to be very important to the decision

substitution effect

the reduction in quantity demanded because relative price has risen

total utility

the total satisfacation one gets from consuming a product

ultimatum game

a game in which the person only gets the money if the other person accepts the offer. If the second person does not accept, they both get nothing

utility

the pleasure or satisfaction that one expects to get from consuming a good or service

utility-maximizing rule

utility is maximized when ratios of the marginal utility to price of two goods are equal

Balance of trade

The difference between the value of exports and the value of imports

Comparative advantage

As long as the relative opportunity costs of producing goods (what must be given up in one good in order to get another good) differ among countries, then there are potential gains from trade.

Economies of scale

the situation in which costs per unit of output fall as output increases.

Embargo

Total restriction on the import or export of a good.

Free trade association

groups of countries that have reduced or eliminated trade barriers among themselves.

General Agreement on Tariffs and Trade (GATT)

a regular international conference to reduce trade barriers (established in 1947 immediately following World War II).

Infant industry argument

with initial protection, an industry will be able to become competitive

Inherent comparative advantage

comparative advantages that are based on factors that are relatively unchangeable

Learning by doing

becoming better at a task the more often you perform it

Most-favored nation

a country that will be charged as low a tariff on its exports as any other country

Quota

Quantity limits placed on imports

Regulatory trade restriction

government-imposed procedural rules that limit imports.

Strategic bargaining

demanding a larger share of the gains from trade than you can reasonably expect

Strategic trade policy

threatening to implement tariffs to bring about a reduction in tariffs or some other concession from the other country.

Tariff

taxes governments place on internationally graded goods, generally imports.

Trade adjustment assistance programs

programs desgiend to compensate loser for reductions in trade restrictions

Transferable comparative advantage

comparative advantages based on factors that can change relatively easy

World Trade Organization (WT0)

an organization whose functions are generally the same as GATT's were - to promote free and fair trade among countries. Unlike GATT, this is a permanent organization with an enforcement system.

Complements

Goods that are used in conjunction with other goods (Ketchup and Hotdogs)

Cross-Price Elasticity of Demand

The percentage change demanded divided by the percentage change in the price of a related good

Elastic

the percentage change in quantity is greater than the percentage change in price E>1

Income Elasticity of Demand

the percentage change in demand divided by the percentage change in income

Inelastic

The percentage change in quantity is less than the percentage change in price E

Inferior Goods

Goods whose consumption decreases when income increases

Luxury

Goods that have an income elasticity greater than one

Necessity

a good that has an income elasticity less than 1

Normal Good

goods whose consumption increases with an increase in income

Perfectly Elastic

Quantity responds enormously to changes in price. Horizontal curve E = infinity

Perfectly inelastic

Quantity does not respond at all to changes in price E=0 vertical curve

Price Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in price

Price Elasticity of Supply

the percentage change in quantity supplied divided by the percentage change in price

Substitute

Goods that can be used in place of one another (Coke and Pepsi)

Unit Elastic

the percentage change is a quantity equals the percentage change in price E=1

Consumer Surplus

The value the consumer gets from buying a product less its price

Deadweight Loss

Loss of consumer and producer surplus from a tax

Excise Tax

A tax levied on a specific good

General Rule of Political Economy

When small groups are helped by a government action and large groups are hurt by that same action, the small group tends to lobby far more effectively than the large group; thus, policies tend to reflect the small group interests, not those of the large group

Price Ceiling

A government set price below the market equilibrium price. It is in essence an implicit tax on producers and an implicit subsidy to consumers. (Price ceilings create shortages, taxes do not)

Price Floor

Government-set prices above equilibrium price (transfer of a consumer surplus to a producer surplus)

Producer Surplus

the price the producer sells a product for less the cost of producing it

Public Choice Economist

Economists who integrate an economic analysis of policies with their analysis of the economy

Rent Seeking Activities

Activities designed to transfer surplus from one group to another

Welfare Loss Triangle

A geometric representation of the welfare cost in terms of misallocated resources caused by a deviation from the supply/demand equilibrium

agent-based computational (ace) model

a culture dish approach to the study economic phenomena in which agents are allowed to interact in a computationally constructed environment and the researcher observes results of that interaction.

behavioral economics

microeconomic analysis that uses a broader set of building blocks than rationality and self-interest used in traditional economics. Also: the study of economic choice that is based on realistic psychological foundations.

butterfly effect

A model in which a small change causes a large effect.

model coefficient of determination

A measure of the proportion of the variability in the data that is accounted for by the statistical model.

econometrics

The statistical analysis of economic data.

empirical model

A model that statistically discovers a pattern in the data.

enlightened self-interest

People care about other people as well as themselves.

game theory model

A model in which one analyzes the strategic interaction of individuals when they take into account the likely response of other people to their actions.

heuristic model

A model that is expressed informally in words.

modern economist

An economist who is willing to use a wider range of models than did earlier economists.

natural experiment

A naturally occurring event that approximates a controlled experiment where something has changed in one place but has not changed somewhere else. That is, an event created by nature that can serve as an experiment.

path-dependent model

A model in which the path to equilibrium affects the equilibrium.

precommitment strategy

a strategy in which people consciously place limitations on their future actions, thereby limiting their choices.

purposeful behavior

Behavior reflecting reasoned but not necessarily rational judgment.

regression model

An empirical model in which one statistically relates one set of variables to another.

self confirming equilibrium

An equilibrium in a model in which peoples beliefs become self-fulfilling.

traditional economist

Economists who study the logical implications of rationality and self interest in relatively simple algebraic or graphical models such as the supply and demand model.

Euro

The currency used by 16 members of the European union.

Exchange Rate

The price of one country's currency in terms of another's currency.

Excise tax

A tax levied on a specific good.

Minimum Wage Law

A law specifying the lowest wage a firm can legally pay an employee.

Price Ceiling

Government imposed limit on how high a price can be charged. In other words, a government-set price below the market equilibrium price.

Price Floor

Government imposed limit on how low a price can be charged. In other words, a government-set price above equilibrium price.

Rent Control

A price ceiling on rents, set by government.

Tariff

An excise tax on an imported (internationally traded) good.

Third Party Payer Market

A market in which the person who receives the good differs from the person paying for the good.

Demand

A schedule of quantities of a good that will be bought per unit of time at various prices.

Demand Curve

The graphic representation of the relationship between price and quantity demanded.

Equilibrium

A concept in which opposing dynamic forces cancel each other out.

Equilibrium Price

The price toward which the invisible hand drives the market.

Equilibrium Quantity

The amount bought and sold and the equilibrium price.

Excess Demand

Situation when quantity demanded is greater than quantity supplied.

Excess Supply

Situation when quantity supplied is greater than quantity demanded.

Fallacy of Composition

The false assumption that what is true for a part will also be true for the whole.

Law of Demand

Quantity demanded rises as price falls. Also can be stated as: Quantity demanded falls as price rises.

Law of Supply

Quantity supplied rises as a price rises. Also can be stated as: Quantity supplied falls as price falls.

Market Demand Curve

The horizontal sum of all individual demand curves

Market Supply Curve

The horizontal sum of all individual supply curves. Also: Horizontal sum of all the firms' marginal cost curves, taking account of any changes in input prices that might occur.

Movement Along a Demand Curve

The graphical representation of the effect of a change in price on the quantity demanded.

Movement Along a Supply Curve

The graphical representation of the effect on a change in price on the quantity supplied.

Quantity Demanded

A specific amount that will be demanded per unit of time at a specific price.

Quantity Supplied

A specific amount that will be supplied at a specific price.

Shift in Demand

The graphical representation of the effect of anything other than price on demand.

Shift In Supply

The graphical representation of the effect of a change in a factor other than price on supply.

Supply

A schedule of quantities a seller is willing to sell per unit of time at various prices.

Supply Curve

A graphical representation of the relationship between price and quantity supplied.