Term
| For a Decrease in the price of a normal good |
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Definition
Substitution effect: Increases
Income effect: Increases
Total: Increase
Downward sloping Demand Curve |
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Term
| For a Decrease in the price of an inferior good |
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Definition
Substitution effect: Increases
Income effect: Decreases
Total Effect: Increases
Downward sloping D curve |
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Term
| For a Decrease in the price of a Giffen Good |
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Definition
Sub effect: Increases
Income effect: decreases
Total effect: decreases
Upward sloping Demand Curve. |
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Term
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Definition
| the change in food consumption associated with a change in the price of food, with the level of utility held constant |
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Term
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Definition
| Change in food consumption brought about by the increase in purchasing power, with price of food held constant |
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Term
| Wages affect Labor Supply |
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Definition
| If SE>IE for the worker s/he works more If IE>SE for the worker s/he works less |
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Term
| Interest Rates affect H/H saving |
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Definition
SE>IE then save more
IE>SE then save less |
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Term
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Definition
Combine Losses
Seggregate small gains from large losses
Out of pocket expenses vs opp costs. |
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Term
| KT 3 heuristics or rule of thumb that people use. |
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Definition
1. Availability. People judge frequencies of events by their availability to remember particular instances but memory depends on more than this.
2. Representativeness. People guess the likelihood of some instance/item belonging to a general class on the basis of how respresentative it is of that class. Regression to the mean effect.
3. Anchoring and adjustment. estimating something by beginning with an anchor and then adjustign from there by using other information they may find relevant. |
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Term
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Definition
| Highest payoff to the player regardless of the opponents actions. Eqbm outcome of the game. |
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Term
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Definition
| A pair of strategies in which neither player wants to change his/her move |
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Term
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Definition
| No nash eqbm nor dominant strategy. therefore choose one strategy and stick to it. |
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Term
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Definition
| Choose a strategy randomly - prisoners dilemma. Nash eqbm makes a random choice among two or more possibilities. Pursuit for self-interest. |
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Term
| Price Discrimination Requires |
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Definition
1. Power over price. Seller faces a downward-sloping demand curve
2. Information about consumer WTP
3. No arbitrage - those who buy low cannot re sell to those who buy high. |
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Term
| 1st degree price discrimination |
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Definition
| Perfect price discrimination. Ideally the firm wants to charge each customer the most that s/he would be WTP. Car sales and auctions, Accountancy work. |
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Term
| 2nd degree price discrimination |
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Definition
| Same customer different prices for identical items. "Block Pricing". Bulk discounts, Buy 1 - 2nd half price. Aim is to capture CS on intial purchases which are valued more highly. Seller doesnt know consumers MV but down know its declining with Q consumed. |
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Term
| 3rd degree Price Discrimination |
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Definition
| Different groups of consumers different prices for all goods they buy. - at least 2 identifiable groups of buyers - with diff price elasticities of demand - Must be able to seperate them - and resale of the g/s is preventable Seller does not know MV but knows WTP (price elasticity) is correlated with characteristics of the consumer e.g. age and gender. |
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Term
| Assymetric informaiton and its relation to Adverse Selection |
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Definition
| - one side of the market has better information than the other e.g seller vs buyer of cars - as a result the fraction of good cars will be smaller than it would be if the consumers could identify quality before making the purchase this is adverse selection. |
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Term
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Definition
| People respond to insurance by engaging in riskier behaviour. The market appears inefficient. |
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Term
| Insufficiently diversified risk |
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Definition
| An insurance company can spread risk only if the risk of a claim is not highly correlated accross the people insured. e.g. earthquake in a valley. Response: Diversify risk. |
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Term
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Definition
| Price is raised until only one bidder remains. That bidder wins the object at the final price which is usually the seoncd highest price. Sequential. |
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Term
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Definition
| Works exactly the opposite way Auctioneer starts at a very high price, then lower the price continuously. First bidder who calls out that she will accept the current price wins the object at that price. Simultaneous game. End up paying the 2nd highest price bid. |
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Term
| First price sealed bid auction |
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Definition
| Each bidder independently submits a single bid without seeing other bids. Object is sold to the highest bidder who makes the highest bid at the price of the highest or 'first' price bid. Simultaneous game. Optimal strategy is to shad your bid |
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Term
| Second-price sealed bid auction |
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Definition
| Similar to the first-price sealed-bid auction. the difference is the price is the 2nd highest bidders bid or 'second' price.Simultaneous game. |
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Term
| 5 Key Characteristics to all four auctions |
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Definition
- Information assymetry - typically seller has more info.
- Decisions are made under conditions of uncertainty.
- Auctioneer acts for the seller so the highest price possible
- Potential buyers are competing with each other so behave strategically
- Bids can be made sequentially or simultaneously. |
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Term
| Adam Smith's invisible hand |
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Definition
| Millions of self-interested individuals and firmsinteracting in markets AS IF they are led by an invisible hand to socially desirable outcomes. Special cases where mkt's give the right outcome but fail to take into externalities therefore fail. |
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Term
Budget Constraint
Budget Line |
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Definition
Shows the maximum possible combination of 2 goods that can be bought from a given income, with a given set of prices.
Consumption possibility frontier, certain amount of income and 2 lots of prices |
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Term
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Definition
Shows all combinations of two goods among which a h/h is indifferent.
1) Higher ICs preferred to lower ICs
2) IC's downward sloping because of
tradeoff. MRS - rate at which a Q of one good must be increased to compensate for the loss of a small Q of another.
3) Bowed inwards - more you consume of one good, the less you desire more of it.
4)Never cross- irrational |
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Term
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Definition
Conventional economic analysis
Rationality
Optimisation
Ignore Sunk Costs
Wealth is fungible/interchangeable |
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Term
| Behavioural/Psychological models |
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Definition
-Explain peoples irrational/inconsistent behaviour
- Descriptive how real people often behave, not how they should behave
- Almost always it is better to not behave in this way. |
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Term
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Definition
Herbet Simon - pioneering research into decision making process - information is costly to gather
- People cognitive processing abilities limited
- People satisfice rather than maximise |
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Term
| Perfectly Compettive Firms |
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Definition
1) Sell a standardised product
2) Are price-takers, too small to influence prices
3) Are perfectly mobile in the LR
4) Have perfect information |
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Term
| Profit maximisation of perfect competition? |
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Definition
| MC=MR. Given their assumption that they are price-takers their MR+P so for them it is profit maximising to produce up to MC=P |
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Term
| Monopoly + profit maximising |
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Definition
Single seller of a product with no close substitutes who serves the entire market.
Faces the mkt demand curve for its product and firm is a price maker.
MC=MR but in this case MR does not = P. |
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Term
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Definition
- Creates DWL
- Redistributes income away from Consumers towards monopolist e.g. super normal profits.
- X-inefficiency (principal agent problems) and rent-seeking behaviour |
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Term
What can policy makers do about monopolies?
- DWL
- Redistribution of income
- X-inefficieny |
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Definition
- Break the monopoly up and deregulate the market. Make it easier for potential rivals to enter. Sell of parts os BSNS, remove govt licenses. e.g. split up generation, network and retail (only be in charge of two)
- Tax profits away still a DWL but tax redistributed to consumers. specific profit taxation makes it worse.
- Subsidise the monopolists production which removes DWL yet all profits end up with monopolist
- Regulate the price monopolist charges and or the rate of return it earns. Require it to set P=MC which removes DWL. Hard part is knowing the MC and companies over claim MC.
- Increase AC to get rid of supernormal profits and X-ineff |
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Term
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Definition
- R + D driven by large firms with mkt power.
Small firms aren't able to afford R+D.
- Competition is derived from innovation
- Larger firms have both ability and the incentive to undertake product innovation and resaerch
- Capitalism is dynamic = creative destruction. |
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Term
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Definition
1)Effects of mergers so that consumers and producers can benefit
2) Efficiency gains from economies of scale. |
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Term
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Definition
Consumer pay a fee for the right to buy a product, e.g. cellphones. and blazers.
Cost of g/s comprises 2 parts. 1) Entry fee. 2) usage fee.
- Price discrimination on the upfront charge and per unit charge = MC. - Lower up front fee plus unit charge above MC |
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Term
| Intemporal Price Discrimination |
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Definition
| Happen naturally, don't need device. Charge a high price when good becomes first available, then lower the price later on. Similar idea to 3rd degree, 2 groups according on time e.g. ahrdcover book vs paperback. |
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Term
| Risk Averse Risk Loving Risk Neutral |
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Definition
- Will not bet when offered actuarially fair gamble
- Will prefer uncertain prospect with particular EV to a certain outcome with the same EV
- Will be indifferent among all alternative with the same EV |
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Term
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Definition
| The outcome of an uncertain situation |
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Term
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Definition
| A commodity whose level depends on which state of the world occurs |
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Term
| Slope of the Budget Constraint |
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Definition
| is –N/H where H is the change in consumption if the contingency on the horizontal axic occurs, and N is the change in consumption if the contingency on the vertical axis occurs. |
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Term
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Definition
| Likelihood of a certain SOTW occurring between 0 and 1. |
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Term
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Definition
| Value of some variable which depends on the state of the world that occurs on average. |
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Term
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Definition
| a budget constrain that shows the opportunities presented by an actuarially fair gamble. On the fair odds line an individual breaks even on an expected value |
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