ECON 2314 CHAPTER 8-11 KEY TERMS

Micro Econ

Anchoring and Adjustment

An estimation technique that begins with an initial approximation (the anchor), which is then modified in accordance with additional available information (the adjustment).

Availability Heuristic

A rule of thumb that estimates the frequency of an event by the ease with which it is possible to summon examples from memory.

Fungibility

The property of an entity whose individual units are interchangeable, as money in separate accounts.

Heuristics

A method or set of rules for solving problems.

Homo Economicus

The narrowly self-interested, well-informed, highly disciplined, and cognitively formidable actor often assumed in traditional economic models.

Judgmental and Decision Heuristics

Rules of thumb that reduce computation costs.

Loss Aversion

The tendency to experience losses as more painful than the pleasures that result from gains of the same magnitude.

Nonpositional Good

A good whose value does not depend heavily on how it compares with other goods in the same category.

Positional Good

A good whose value depends relatively heavily on how it compares with other goods in the same category.

Regression to the Mean

The phenomenon that unusual events are likely to be followed by more nearly normal ones.

Representativeness Heuristic

A rule of thumb according to which the likelihood of something belonging to a given category increases with the extent to which it shares characteristics with stereotypical members of that category.

Satisficing

A decision-making strategy that aims for adequate results because optimal results may necessitate excessive expenditure of resources.

Status Quo Bias

The general resistance to change, often stemming from loss aversion.

Weber-Fechner Law

The relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus.

 

 

COASE THEOREM

if, at no cost, people can negotiate the purchase and sale of the right to perform activities that cause externalities, they can always arrive at efficient solutions to the problems caused by externalities. This theorem suggests that private parties can negotiate solutions to externalities without government intervention, leading to optimal resource allocation.

EXTERNAL BENEFIT (OR POSITIVE EXTERNALITY)

a benefit of an activity received by people other than those who pursue the activity

EXTERNAL COST (OR NEGATIVE EXTERNALITY)

a cost of an activity that falls on people other than those who pursue the activity

EXTERNALITY

an external cost or benefit of an activity

POSITIONAL ARMS CONTROL AGREEMENT

an agreement in which contestants attempt to limit mutually offsetting investments in performance enhancement

POSITIONAL ARMS RACE

a series of mutually offsetting investments in performance enhancement that is stimulated by a positional externality

POSITIONAL EXTERNALITY

this occurs when an increase in one person’s performance reduces the expected reward of another’s in situations in which reward depends on relative performance

TRAGEDY OF THE COMMONS

the tendency for a resource that has no price to be used until its marginal benefit falls to zero

ADVERSE SELECTION

the pattern in which insurance tends to be purchased disproportionately by those who are most costly for companies to insure

EARNED-INCOME TAX CREDIT (EITC)

a policy under which low-income workers receive credits on their federal income tax

FIRST-DOLLAR INSURANCE COVERAGE

insurance that pays all expenses generated by the insured activity

HEALTH MAINTENANCE ORGANIZATION (HMO)

a group of physicians that provides health services to individuals and families for a fixed annual fee

IN-KIND TRANSFER

a payment made not in the form of cash, but in the form of a good or service

MEANS-TESTED

a benefit program whose benefit level declines as the recipient earns additional income

NEGATIVE INCOME TAX (NIT)

a system under which the government would grant every citizen a cash payment each year, financed by an additional tax on earned income.

PERSONAL RESPONSIBILITY AND WORK OPPORTUNITY RECONCILIATION ACT

the 1996 federal law that transferred responsibility for welfare programs from the federal level to the state level and placed a five-year lifetime limit on payment of AFDC benefits to any given recipient

POVERTY THRESHOLD

the level of income below which the federal government classifies a family as poor

ABSOLUTE ADVANTAGE

one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person

CLOSED ECONOMY

an economy that does not trade with the rest of the world

COMPARATIVE ADVANTAGE

one person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person’s opportunity cost

OPEN ECONOMY

an economy that trades with other countries

PROTECTIONISM

the view that free trade is injurious and should be restricted

QUOTA

a legal limit on the quantity of a good that may be imported

TARIFF

a tax imposed on an imported good

WORLD PRICE

the price at which a good or service is traded on international markets