Key Concepts in Economics and Supply-Demand Analysis, Key Concepts in Microeconomics and Behavioral Economics, Key Concepts in Economics and Game Theory

Marginal benefit

The amount of additional benefit arising from the choice.

Perverse incentives

In class, we discussed the case of a daycare that began charging parents for being late to pick up their children, only to find that more parents turned up late.

Opportunity cost

Is what we give up when we make a choice.

Normative economic statement

The government should prioritize reducing the national debt above all else.

Production factors for French toast

Eggs - Raw materials, Recipe book - Capital, Your friend helping you cook - Labor.

Capital

Any input factor which is not destroyed or consumed in the process of production.

NOT a form of capital

Land.

Economies of scale

Cost advantages that firms enjoy when they produce a greater quantity of output.

NOT an example of economy of scale

As a bank grows, it pays more overhead in the form of legal fees and facilities maintenance.

Law of diminishing returns

According to the law of diminishing returns, the marginal product of a production factor falls as more of it is used, holding constant the other factors of production.

Vertical integration

Amazon now uses its own delivery trucks instead of employing UPS or FedEx for its deliveries.

A fixed cost

Remains the same regardless of the quantity of output produced by the firm.

Example of a fixed cost

A carpenter paying for a new electric saw.

A firm's profit

The difference between its revenue and its costs.

Example of increasing marginal cost

As a growing restaurant begins to run out of kitchen space, it becomes increasingly expensive for the firm to produce additional meals.

Revenue Function

The diagonal red line.

Cost Function

The curved increasing blue line.

Profit Function

The green line that reaches a maximum value before falling.

Effect of price increase on maximum profit scale

This would cause the scale of maximum profit to rise.

Law of supply

As the price of its output good increases, the quantity supplied by a firm will rise.

Negative supply shock on the goods market

A disease affecting chickens leads to a fall in the production of eggs.

Positive demand shock on the goods market

Sales of candy increase because it's Halloween.

Negative supply shock on the labor market

Many workers retire early or quit in response to the coronavirus pandemic.

Positive supply shock on the goods market

A pizzeria buys a new oven that lets them produce more pizza in the same amount of time.

Positive supply shock

Price falls and quantity rises.

Positive demand shock

Price and quantity both rise.

Negative supply shock

Price rises and quantity falls.

Negative demand shock

Price and quantity both fall.

Effect of local restaurants raising prices

This would cause your firm's supply curve to shift to the left.

Effect of technology increase on supply curve

All else being equal, an increase in the level of technology at a firm will cause its supply curve to shift to the right.

Violation of the law of demand

People buy more of a designer shoe when its price is increased because it becomes more of a status symbol.

Horizontal and vertical axis in labor market diagram

Hours worked and wages.

Consumer Surplus

The amount of money saved by consumers, compared to the maximum amount they were willing to pay.

Reading the demand curve backwards tells you

The marginal value or willingness to pay as a function of the amount fo good consumed.

Price Ceiling

A legal maximum price at which a good can be sold.

Quantity Demanded

The total amount of a good that consumers are willing to purchase at a given price.

Rent Control

A real-world example of a price ceiling.

Perfectly Competitive Market

A market structure where firms make zero profits.

Assumption of Perfect Competition

A condition that firms must not limit output to keep prices high.

Perfectly Competitive Market Example

Generic drugs.

Monopoly Output

Less output compared to a firm in perfect competition.

Monopoly Profit Margin

Higher profit margin compared to firms in perfect competition.

Legal Monopoly Example

Nike is not an example of a legal monopoly.

Inelastic Demand

A situation where a monopoly can charge a higher price.

Oligopoly or Cartel

Market structures featuring the greatest degree of coordination between suppliers.

Common Market Structure

Monopolistic Competition is the most common in the real world.

Negative Externality Example

Public education is not an example of a negative externality.

Nash Equilibrium

Involves both agents best responding to each other's strategy.

Prisoner's Dilemma Nash Equilibrium

Both agents choose to betray one another.

Real-world Prisoner's Dilemma Example

Two Hockey teams that both chose not to wear helmets despite the risk, not wanting the other team to have an advantage

Iterated Prisoner's Dilemma

Players often choose to match whatever their opponent does.

Invisible Hand Contradiction

Public Goods and Prisoners Dillema contradict Adam Smith's theory.

Utility in Microeconomics

The satisfaction or enjoyment we receive from a given payout or situation.

Diminishing Marginal Utility

The principle that people's utility functions follow the law of diminishing returns.

Expected Value of a Game

The average amount one expects to win or lose from that game, played a large number of times.

Risk Averse

Most people will select the safer option due to risk aversion.

Expected Utility

The sure $50 is preferred because its expected utility is greater.

Behavioral Economics Preference

People interpret losing nothing as losing fifty dollars, not as breaking even.

St. Petersburg Paradox

Describes a game with infinite expected value.

Behavioral Economics Definition

A branch of microeconomics that incorporates theories and methods from psychology.

Endowment Effect

The tendency of people to overvalue what they already have.

Framing Effect Example

People make different choices based on how a payment is presented.

Availability Heuristic

The tendency of people to assign too much weight to outcomes that are easy to imagine or remember.

Economics

Economics is the quantitative social science and the study of how people use scarce resources to satisfy unlimited wants.

Capital

Any input factor which is not destroyed or consumed in the process of production.

Law of Diminishing Returns

Associated with a concave shape of production function.

Fixed Cost

A farmer pays for a new plot of land and an auto firm builds a new factory.

Factor of Production

Anything the firm uses to produce its good or service.

Positive Shock

A shift to the right.

Improved Technology

Causing more efficient production shifts the supply curve to the right and lowers the price of the good.

Law of Supply

As the price rises, the quantity supplied will rise.

Marginal Product

Falls as more of an input factor is used, holding others constant.

Normative Economic Statement

The ideal tax rate is zero percent.

Shift in Supply Diagram

Represents an decrease in supply.

Cause of Increase in Supply

An embargo or an increase in wages paid to workers of the firm.

Examples of Law of Diminishing Returns

Communication difficulty in a large firm; Restaurant running out of space for tables.

Supply Curve Backwards

The marginal cost curve.

Demand Curve Backwards

The marginal value curve.

What does the area above the price point and below the demand curve represent in a Supply and Demand Diagram?

Consumer Surplus

What does the area below the price point and above the supply curve represent in a Supply and Demand Diagram?

Producer Surplus

What does the area under the supply curve represent in a Supply and Demand Diagram?

Total Cost (excluding fixed cost)

What does the sum of areas B and C represent in a Supply and Demand Diagram?

Total Revenue

Monopoly vs. Perfect Competition

Makes more profit, charges a higher price, and produces less output.

Elasticity of Demand

The lower it is, the more pricing power monopolies have.

Inelastic Demand

Is more of a necessity, has fewer substitutes, and isn't sensitive to price.

Order of Competition

Monopoly → Duopoly → Cartel/Oligopoly → Monopolistic Competition → Perfect Competition.

Game Theory Interactions

All of the above (Poker, Country negotiations, Marketplace competition).

Strategic in Game Theory

Each player anticipates others' actions and adjusts their own accordingly.

Nash Equilibrium in Prisoner's Dilemma

Both players betray their partner.

Expected Value

The average win/loss over many repetitions.

Utility in Microeconomics

The satisfaction we get from a certain amount of income or money.

Diminishing Marginal Utility

Follows the law of diminishing returns.

Risk Aversion and St. Petersburg Paradox

People are assumed to maximize expected utility.

Framing Effect

A and C — (Fat vs. lean labeling; Survival vs. death framing).

Availability Heuristic

Thinking large cities have more crime because they're easily recalled.

Normal Distributions

Usually arise when many random, independent factors are added together.

Pareto Distribution Variables

All of the above (Celebrity income, Planet mass, Firm size).

Continuous Variable from Class Survey

High school GPA.

In our class data, we found that on average, students from more rural areas in Virginia were more likely to oppose gun control. What could explain this relationship?

Usage, self-selection, third factor like politics