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Microeconomics Midterm
N/A
52
Economics
Graduate
02/03/2013

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Term
Public Finance
and
The Four Q's of Public Finance
Definition
The study of the role of the government in the economy.
1- WHEN should the govt get involved?
2- HOW might the government get involved?
3- WHAT is the effect of those interventions on economic outcomes?
4- WHY do govt choose to intervene in the way that they do?
Term
Market Failure

Name Four Types
Definition
Problem that causes the market economy to deliver an outcome that does not maximize efficiency- 1st motivation for govt to get involved
a. Public goods
b. Monopoly
c. Asymmetric information
d. Externalities
Term
Positive Externality
Definition

Individual/firm making a decision does not receive the full benefit of the decision. Benefit to the individual or firm is less than the benefit to society.

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Term
Negative Externality
Definition

:an action of a product on consumers that imposes a negative side effect on a third party; it is "social cost".

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Term
Redistribution
Definition
The shifting of resources from some groups in society to another
Term
Tax
Definition
Raise the price for private sales or purchases of goods that are overproduced (a price mechanism)
Term
Subsidy
Definition
Lower the price for private sales or purchases of goods that are under produced(a price mechanism)
Term
Price Mechanism
Definition
A way for the govt to address the failures in the private market is to use the taxes or subsidies
Term
Income Effect
Definition
Quantity decreased, but income stayed the same, but the price has increased- it is as if the income is being lowered
Term
Substitution Effect
Definition
The idea that as prices rise (or incomes decrease) consumers will replace more expensive items with less costly alternatives.
Term
Normal Good
Definition

normal goods are any goods for which demand increases when income increases and falls when income decreases but price remains constant

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Term
Inferior Good
Definition

inferior good is a good that decreases in demand when consumer income rises

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Term
Other Goods
Definition
Substitutes: Used in place with the original good
Compliments: Used with the original good
Term
Demand Curve
Definition
a curve showing the quantity of a good demanded by individuals at each price
Term
Supply Curve
Definition
relationship between product price and quantity of product that a seller is willing and able to supply
Term
Price-Ceiling
Definition
government-imposed limit on how high a price is charged for a product.
Term
Budget Constraint
Definition
Limits on resources
Term
Indifference Curve
Definition
representation of all bundles of goods that make an individual equally well off. Because these bundles have equal utility, an individual is indifferent as to which bundle he consumes.
1. Consumers prefer higher indifference curves. Individuals prefer to consume bundles that are located on indifference curves that are farther out from the origin because they represent bundles that have more of the goods.
2. Indifference curves are always downward sloping. Indifference curves cannot slope upward because that would imply that you ARE indifferent, which violates the more is better assumption.
Term
Maximize Utility
Definition
Constrained Utility Maximization: the process of maximizing the well being (utility) of an individual, subject to her resources (budget constraint)
Term
Welfare Economics
Definition
the study of the determinants of well-being, or welfare, in society
Term
Opportunity Cost
Definition
the cost of any purchase is the next best alternative use of that money or the forgone opportunity
Term
Microeconomics vs. Macroeconomics
Definition
Micro economics pertains to individuals behavior while macroeconomics in the entire economy
Term
Inelastic
Definition
Lack of response to a change in the price of a good
Term
Elastic
Definition
Elasticity of demand: the percentage change in the quantity demand of a good caused by each 1% change in the price of that good.
Term
Direct effects:
Definition
the effects of government interventions that would be predicted if individuals did not change their behavior in response to the interventions
Term
Indirect effects:
Definition
the effects of government interventions that arise only because individuals change their behavior in response to the interventions.
Term
Political Economy:
Definition
the theory of how the political process produces decisions that affect individuals in the economy
Term
Public goods:
Definition
goods for which the investment of any one individual benefits everyone in a larger group
Term
Social Insurance Programs:
Definition
government provision of insurance against adverse events to address failures in the private insurance market
Term
Theoretical Tools:
Definition
the set of tools designed to understand the mechanics behind economic decision making
Term
Empirical tools:
Definition
the set of tools designed to analyze data and answer questions raised by theoretical analysis
Term
Utility function:
Definition
mathematical function representing an individual’s set of preferences- which translates her well-being from different consumption bundles into units that can be compared in order to determine choice
Term
Constrained Utility Maximization:
Definition
the process of maximizing the well being (utility) of an individual, subject to her resources (budget constraint)
Term
Marginal Utility
Definition
marginal utility of a good or service is the gain (or loss) from an increase (or decrease) in the consumption of that good or service. diminishing marginal utility, meaning that the first unit of consumption of a good or service yields more utility than the second and subsequent units, with a continuing reduction for greater amounts.
Term
Marginal rate of substitution (MRS):
Definition
Marginal Rate of Substitution: the rate at which you would buy a substitute product and still be just as satisfied with the original product rate at which the consumer will trade the good on the vertical axis for the good on the horizontal access
Term
Direct effects:
Definition
the effects of government interventions that would be predicted if individuals did not change their behavior in response to the interventions
Term
Indirect Effects
Definition
he effects of government interventions that arise only because individuals change their behavior in response to the interventions.
Term
FICA TAX
Definition
FICA Tax 6.2% from you and from (employer
Market Failure?)
40 quarters of work
62+ for minimum benefits
Term
Quantity Demanded
vs.
Demand:
Definition
Quantity Demanded: A change in price and change in demand
Demand: Constant price would more people want it
Term
Social Efficiency
Definition
the size of the pie, represents the net gains to society from all trades that are made in a particular market, consists of two components
i. Consumer Surplus: the benefit the consumers derive from consuming a good, above and beyond the price they paid for the good
ii. Producer Surplus: the benefit that producers derive from selling a good, above and beyond the cost of producing that good
iii. Total Social Surplus: the sum of consumer surplus and producer surplus
Term
First Fundamental Theorem of Welfare Economics:
Definition
the competitive equilibrium where supply equals demand, maximizes social efficiency.
Term
Second Fundamental Theorem of Welfare Economics:
Definition
society can attain any efficient outcome by suitably redistributing resources among individuals and then allowing them to freely trade
Term
Negative consumption
Definition
externality (opposed to production externality like smoking)
Term
Potential Social Security
Definition
-Raise taxes
-Extend the Base of Taxable wages (above the first 102,000 dollars)
-Raise the retirement age
-Lower Benefits
-Reduce benefits for higher income groups
-Invest trust funds in stocks
Term
Healthcare Private Plan
Definition
Purchased by the individual, usually through employer. (Most popular form of plan)
-Risk pooling and the tax subsidy are the major incentives for businesses to provide insurance
Term
Deductions
Definition
(Individuals face the full cost of care up to a limit. A $100 deductible means the individual would pay the first $100 of costs)
Term
Copayment
Definition
Fixed payment for a medical visit or prescription
Term
Coinsurance
Definition
Patient pays a percentage as opposed to fixed amount (copayment).
Term
Public Health Insurance
Medicare
Definition
 Medicare
• Coverage for the elderly and disabled
• Funded through FICA taxes
•Eligibility after ten years of work, 65+
Term
Public Health Insurance Medicaid
Definition
•Coverage for the poor
•Means tested
Term
o Risk pooling
Definition
• Statistical way of measuring risk in a given pool of people. Used to set rates.
•Goal is to create large pools with predictable medical risks.
Term
o Uninsured
Definition
Cost shifting- someone has to pay for their care
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