Term
| Theory of consumer behavior |
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Definition
1. People will maximize well being
2. People will engage in "trucking and trading" - markets matter |
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Term
| Axioms of rational choice theory |
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Definition
1) completeness, people know their mind. Given a choice between any 2 bundles, a and b, a consumer either prefers a to b, prefers b to a, or is indifferent between a and b
2) transitivity (consistency) – if a consumer prefers a to b, and b to c, then s/he prefers a to c
3) continuity (willingness to trade) – if a consumer chooses bundle {X,Y} then if one commodity, x, is varied by ∆x, it is possible to adjust the other, ∆y, such that {x+∆x, y+∆y} is preferred to {x,y}
4) Non-satiation (greed) – a consumer prefers a to b if a has more of at least one of the good, x and y
5) Convexity (declining marginal utility) – if U(a)=U(b), then if c=∂a+(1-2)b [0<∂<1], U(c)>U(a)=U(b) |
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Term
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Definition
how responsive is one thing to another thing – a unitless measure of the % change in 1 variable due to a % change in another variable
Inelastic elasticity < 1 and elastic elasticity > 1 |
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| money now is worth more than money in the future. Infinite present value is b/r |
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| monetary measure of the change of utility or well being - the difference between the maximum price a consumer is willing to pay and the actual price they do pay |
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Term
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Definition
| once insured, the insurance does not play due diligence - a party insulated from risk behaves differently from how it would behave if it were fully exposed to the risk |
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| people value a random event based solely on expected value |
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| people prefer an expected value of a situation to a gamble of expected value, they are a candidate for insurance |
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| in a context of uncertainty, one side of the market knows a great deal more of the probability distribution than the other |
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Definition
| a risk management solution that groups together resources (assets, equipment, personnel, effort, etc.) for the purposes of maximizing advantage and/or minimizing risk to the users |
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| the weighted sum of the potential outcome weighted by the different probabilities E = x1*p1+x2*p2 |
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Definition
| "betting preferences" of people with regard to uncertain outcomes (gambles) are represented by a function of the payouts (whether in money or other goods), the probabilities of occurrence, risk aversion, and the different utility of the same payout to people with different assets or personal preferences |
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Definition
| the maximum level of output which is produceable from a series of inputs |
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| combination of factor inputs which generate the same level of outputs (similar to indifference curves) |
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Definition
| all combinations of factor inputs that cost the same amount (perfect substitutes) - the slope of the isocost depends on the relative value of inputs |
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Term
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Definition
| how much incremental cost must be incurred for the incremental increase of 1 unit - ∆VC/∆q or ∆TC/∆q |
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| the rate of change of output per unit of change of input - ∆output/∆input |
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Term
| Profit maximizing implications |
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Definition
| marginal revenue product of capital = rental price of capital - eg. MRPk=r, MRPl=w, MC=P |
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Term
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Definition
| MR*MP - there is an increase in revenue from hiring one more input |
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| the rate of change in cost per unit increase of output, on the assumption that the firm is profit maximizing |
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Definition
given technology and the price of factor inputs, what is the minimum cost of producing any level of output
(total cost) TC= FC + VC (fixed cost + variable cost) |
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Term
| How to decide whether to go into business and how to decide whether to stay in business |
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Definition
| To stay in business, (marginal cost) MC > AVC (average variable cost). To go into business, MC > ATC (average total cost) (ATC = (avc + afc)/q) |
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Term
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Definition
| progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government - the problem with this is that there is an incentive not to work at one point |
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Definition
| for every $ increased income you receive $ benefit - how much you lose of a negative income tax benefit for every $ you make |
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Definition
| Marginal effective tax rate, where METR = MTR (marginal tax rate) + MCR (marginal clawback rate) |
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Definition
| workers with compensation if they are forced to move to a job with a lower salary |
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Definition
| direct payments to poor individuals as a sum of utility individual utility functions |
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Term
| Marginal rate of substitution |
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Definition
| the rate at which a consumer is ready to give up one good in exchange for another good while maintaining the same level of utility. |
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Term
| Saturation (market or good) |
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Definition
| a term used to describe a situation in which a product has become diffused (distributed) within a market, or for an individual good |
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Term
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Definition
| graph showing different bundles of goods between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another. |
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Definition
| a good with a positive cross elasticity of demand. This means a good's demand is increased when the price of another good is increased. |
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Definition
| a negative cross elasticity of demand. This means a good's demand is increased when the price of another good is decreased. |
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| the guaranteed amount of money that an individual would view as equally desirable as a risky asset |
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| the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service is dependent on the number of others using it |
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Definition
| the perceived business practice of a company providing a product or a service to only the high-value or low-cost customers of that product or service |
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Term
| Normal and inferior goods |
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Definition
| inferior good is a good that decreases in demand when consumer income rises. Normal goods are those for which consumers' demand increases when their income increases. |
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Term
| Compensating and equivalent variation of consumer surplus |
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Definition
CV: the amount of additional money an agent would need to reach its initial utility after a change in prices, or a change in product quality, or the introduction of new product
EV: how much more money a consumer would pay before a price increase to avert the price increase |
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Term
| Opportunity cost vs. economic cost |
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Definition
opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the cost is weighed against the value of that activity in deciding on more or less of it (forgone benefits)
economic costs are costs to a firm of utilizing economic resources in production, including opportunity costs |
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Term
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Definition
| short run - costs are fixed. long run - all inputs can be varied |
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Term
| Long run vs short run elasticity of demand |
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Definition
| Short run - 1 year or less. Long run - enough time is allowed for consumers and producers to adjust fully to the price change. for durable goods, demand is more elastic in the short run than the long run |
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Term
| Condition of constrained utility maximization |
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Definition
| Consumers maximize utility subject to a budget and it must give a consumer the most preferred combination of goods and services |
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Term
| Disaggregation of a change in price of a good into income and substitution effects |
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Definition
Income effect - change in consumption of a good resulting from an increase in purchasing power, with relavent prices constant (∆p affects buyers decisions)
substitution effect: change in consumption of a good associates with a change in the price, with the level of utility held constant (∆p leading consumer to choose one good over another)
total effect: substitution effect and income effect together |
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Term
| Marginal rate of technical substitution |
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Definition
| amount by which the quantity of one input can be reduced when one esxtra unit of another input is used, so that output remains constant MRTS=-∆oneinput/∆otherinput = MPoneinput/MPotherinput |
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