Term
| What is the goal of consumers? |
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Definition
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The goal of the consumers is to maximize utility, subject to constraints of y, Pa, Pb. |
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Term
| What is the maximizing condition for consumers in equation form? |
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Definition
Consumers: MUa/MUb=Pa/Pb
Where MUa = Maximum utility of good a
Where MUb= Maximum utility of good b
Where Pa = Price of good a
Where Pb = Price of good b
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Term
| What is the goal of producers? |
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Definition
The goal of producers is to maximize profit (TT) |
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Term
| What is the maximizing condition for producers in equation form? |
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Definition
Pa/Pb=MCa/MCb
Where MCa = Marginal cost of good a
Where MCb= Marginal cost of good b
Where Pa = Price of good a
Where Pb = Price of good b
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Term
| Why do consumers and producers behave as they do? |
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Definition
| Because they are guided by rationality and self interest to maximize their personal gains |
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Term
| State the pareto optimum and explain why it is optimum. |
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Definition
MUA/MUB=PA/PB=MCA/MCB
It is optimum because it is the point at which the consumer is maximizing utility and producer is maximizing profit, simultaneously. And it is the point at which it is no longer possible to improve the conditions of one party without making at least one other party worse off |
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Term
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Definition
| it describes prices that adjust to bring the two sides of the market into equality |
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Term
| What did Kaldor-Hicks describe as a modification to pareto optimum |
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Definition
| The optimal point occurs when there is a net gain in welfare, regardless of if one party is worse off |
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Term
| What are the two ways neoeclassical economists explain price adjustment? |
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Definition
1. Prices adjust because we assume prices are already at equilibrium or that adjustment happens instantaneously.
2. Tatonnement: process where bout an auctioneer flashes a set of virtual prices to which buyer and seller responds by formulating their intents of how much they will buy or sell at those prices; if there is excess, auctioneer lowers prices; if there is not enough, prices are raised; process continues until all excess demands and supplies are eliminated |
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Term
| What is the market mechanism according to neoclassical theory? |
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Definition
| The invisible hand. This is the notion that overall welfare will be enhanced through the individual pursuit of self-interest, and society's overall welfare is the sum of each individual's pursuit of self-interest. |
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Term
| What is positive economics? |
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Definition
| The branch of economics that concern the descriptive and explanation of economic phenomena; focuses on facts and cause-and-effect relationships and tests economic theories. |
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Term
| What is positive economics used for? |
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Definition
| Because it only tells us what happens, and does not provide instruction on which policy should be followed, we use it to explain economic behavior of interest. |
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Term
| What is normative economics? |
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Definition
| It incorporates value judgments about what the economy ought to be like or what policy actions ought to be recommended to achieve something. |
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Term
| Why would we use normative economics? |
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Definition
| Because it gives us something to strive for; For example, one might argue that we strive to realize the vision of the neoclassical theory because the big picture suggests a vision of an economy with maximum wealth and happiness, and efficient/optimal distribution |
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