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Microeconomics
econ
32
Economics
Undergraduate 1
04/16/2009

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Term
Closed Economy
Definition
an economy that does not trade with other nations
Term
Open economy
Definition
an economy that trades with other countries
Term
Consumption Possibilities
Definition
the combinations of goods and services that a country's citizens might feasibly consume
Term
autarky
Definition
a situation in which a country does not trade with other nations
Term
World Price
Definition
the price at which a good or service is traded on an international market
Term
Protectionism
Definition
view that free trade is injurious and should be limited
Term
Tariff
Definition
tax on imported good
Term
Quota
Definition
legal limit on the quantity of good that can be imported
Term
Basic Elements of a game
Definition
the players, the strategies available to each player and the payoffs each player receives for each possible combination of strategies
Term
Payoff Matrix
Definition
a table that describes the payoffs in a game for each possible combination of strategies
Term
Nash equilibrium
Definition
any combination of strategies in which each players strategy is his/her best choice given the other player's strategy
Term
Prisoners dilemma
Definition
a game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy
Term
Cartel
Definition
a collation of firms that agree to restrict output for the purpose of earning and economic profit
Term
Repeated Prisoner's Dilemma
Definition
a standard prisoner's dilemma, that confronts the same players repeatedly
Term
tit-for-tat
Definition
a strategy for the repeated prisoner's dilemma, in which players cooperate on the first move, them mimic the other partners last move, for each successive move
Term
Decision tree (game tree)
Definition
a diagram that describes the possible moves in a game in sequence and lists the payoffs that correspond to each possible combination of moves
Term
Credible threat
Definition
a threat to take action that is in the threatener's interest to take out
Term
Credible Promise
Definition
a promise to take an action that is in the promiser's interest to keep
Term
Commitment problem
Definition
a situation in which people cannot achieve their goals because of an inability to make credible threats/promises
Term
Commitment device
Definition
a way of changing incentives so as to make otherwise empty threats or a promise credible
Term
External Cost (Negative Externality)
Definition
a cost of an activity that falls on people other than those that pursue the activity (pollution)
Term
External Benefit (positive externality)
Definition
a benefit of an activity received by other than those that pursue the activity
Term
Externality
Definition
an external cost/benefit of an activity
Term
Coase Theorem
Definition
if at no cost people can negotiate the purchase and a sale of the right to preform activities that cause externalities, they can always arrive at efficient solutions to the problems caused by externalities
Term
Tragedy of the Commons
Definition
the tendency for a resource that has no price to be used until its marginal benefits fall to a zero
Term
Free rider problem
Definition
an incentive problem in which too little of a good or service is produced because non payers cannot be excluded from using it
Term
Expected value of a gamble
Definition
the sum of the possible outcomes of the game multiplied by the respected probabilities
Term
Fair Gamble
Definition
a gamble which expected value is zero
Term
Better than fair gamble
Definition
one who's expected value is positive
Term
risk neutral person

risk averse person
Definition
someone who would accept any gamble that is fair or better

someone who would refuse any fair gamble
Term
Asymmetric Information
Definition
situations in which buyers and sellers are not equally well informed about the characteristics of goods and services for sale in the marketplace
Term
lemons model
Definition
George Akerloff's explanation of how asymmetric information tends to reduce the average quality of goods offered for sale
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