Introductory Economics Exam 3 Flashcards: Utility, Externalities, Monopolies, Taxes, Consumer Behavior

Utility

subjective amount of satisfaction a consumer gets from consuming a certain product

Alturism

behavior that works to benefit others at a cost to themselves. ex. donating to charity.

Reciprocity

exchanging things for mutual benefit, expecting something in return. ex. manager gifting something to employee, expecting to be returned in the future. (ROI)

Diamond-Water Paradox

The concept that while some products may serve as a necessity and some not, the value attributed with them will not necessarily match that.

marginalists’ subjective theory of value

the idea that bubbles in market price do not exist, that the high price purchased is the market value when consumed. 

Cardinal Theory of Utility

consumers quantifying utility using units called utils. this value is different for a different customer (ex. apples and bananas)  A = 2B

Ordinal Theory of Utility

consumers ranking their utilities based on how much they think each product benefits them. each consumer ranks differently. ex. A > B

the law of diminishing marginal utility

marginal utility declines as consumption increases. each new level of consumption satisfies the consumer less.

pecuniary externality

financial loss to a third party

Theory of Consumer Behavior

the study of how consumers make their consumption decisions. assumed to behave rationally, respond to incentives and limited to their budget. 

Revealed preference

incentives that consumers respond to, identified by companies. ex. reusable water bottles, environmentalism

bundles

different consumption combinations that completely use the available consumers budget. ex. 2 concerts, 1 movie or 1 concert, 3 movies.

budget line

different consumption combinations graphically distributed along a line.

budget set

any consumption combination that doesn’t entirely use the consumers budget.

substitution effect

consumer buying less of a substitute price due to it being relatively more expensive than competition.

indifference curve

combinations of two goods that give the same amount of satisfaction to a consumer.

marginal rate of substitution

how much of a product consumers are willing to give up to gain the same utility from another product.

consumer equilibrium

marginal rate of substitution = market rate of substitution (market prices match the utility consumers attribute to the two products)

externality

an economic transactions benefits or costs to outsiders. (spillover)

coase theorum

when transaction costs are negligible, property rights are clearly defined, externalities are able to be addressed by private individuals making agreements with each other. ex. noisy factory.

pigouvian taxes

taxes imposed with the intention of decreasing consumption of goods producing negative externalities (ex. taxing tobacco products)

Tradable allowances/permits

government establishing cap of negative externalities for a market, leading companies to sell permits and lower externality production

Higher the price elasticity of demand, ______ the deadweight loss due to taxes

higher

lump sum/ head tax

taxing a fixed amount, works in theory but doesn’t account for economic burden of lowest income individuals or it isn’t profitable.

higher

the more complex the tax, the _______ the administrative burden on public finance is.

government increases, sells _____.

less 

monopolistic competitor

a competitor that is a sole contributor of a product that has substitutes. ex. olive garden and red lobster