Microeconomics Midterm Vocab Set (NJB)

Labour Market

The market in which employers offer wages to individuals who may agree to work under their direction. Economists say that employers are on the demand side of this market, while employees are on the supply side.

Payoff(s)

The pay-off for an individual player in a game is the benefit that the player receives as a result of the joint actions of all the players.

Relative Prices

The price of one good or service compared to another (usually expressed as a ratio of the two prices).

Conspicuous Consumption

The purchases of goods and services to publicly display ones social and economic status.

Pareto Efficiency Curve

The set of all allocations that are Pareto efficient. The Pareto efficiency curve is sometimes called the 'contract curve', even though it is not necessary for any contract to be involved.

Conflict of Interest

The situation that arises in an economic interaction if in order for one party to gain more, another party must do less well.

Division of Labour

The specialization of producers to carry out different tasks in the production process.

Joint Surplus

The sum of the economic rents of all involved in an economic interaction.

Gender Division of Labour

The ways men and women differ in how they spend their (paid and unpaid) work time.

Crowded Out

There are two quite distinct uses of the term. One is a negative effect that is observed when economic incentives displace people's ethical or social motivations. In studies of individual behaviour, incentives may have a crowding out effect on social preferences. The second use of the term is to refer to the effect of an increase in government spending in reducing private spending, as would be expected for example in an economy working at full capacity utilization, or when a fiscal expansion is associated with a rise in the interest rate.

Casual

We can say that a relationship between two variables is causal if we can establish that a change in one variable produces a change in the other. While a correlation is simply an assessment that two things have moved together, causation implies a mechanism accounting for the association, and is therefore a more restrictive concept.

Economies of Scale

When production exhibits increasing returns to scale, increasing all of the inputs to a production process by the same proportion increases the output by a higher proportion. The shape of a firm's long run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs.

Reservation Option

When someone makes a choice amongst the available options in a particular transaction, the reservation option is the next best alternative option.

Marginal Change

When two variables, x and y, are related to each other, the effect of a marginal change is the change in y that occurs in response to a small increase in x. If y is a continuous function of x, the marginal change in y is the rate of change of y with respect to x: that is, the derivative of the function.

Player(s)

Who is interacting with whom.

Homo Economicus

Latin for 'economic man', used to describe an economic actor who is assumed to make decisions entirely in pursuit of their own of self-interest.

Property Rights

Legal protection of ownership, including the right to exclude others and to benefit from or sell the thing owned. Property rights may cover broadly-defined goods such as clean water, safety, or education, if these are protected by the legal system.

Purchasing Power Parity (PPP)

PPPs are price indices that measure how much it costs to purchase a basket of goods and services compared to how much it costs to purchase the same basket in a reference country in a particular year, such as the United States in 2011.

Cooperation

Participating in a common project that is intended to produce mutual benefits.

Innovation Rent

Profits in excess of the opportunity cost of a capital that an innovator goes by introducing a new technology, organizational firm, or marketing strategy.

Social Interactions

Situations in which the actions taken by each person affect other peoples outcomes as well as their own.

Free-Riders

Someone who benefits from the contributions of others to some cooperative project without contributing themselves is said to be free riding, or said to be a free rider.

Private Property

Something is private property if the person possessing it has the right to exclude others from it, to benefit from the use of it, and to exchange it with others.

Pareto Criterion

The Pareto criterion is a way of comparing two allocations, A and B. It states that A is an improvement on B if at least one person would be strictly better off with A than B (in other words, would strictly prefer A to B) and nobody would be worse off. We say that A Pareto dominates B.

Power

The ability to go (and get) the things one wants in opposition to the intentions of others.

Marginal Utility

The additional utility resulting from a one-unit increase in the amount of a good.

Gains from Exchange

The benefits that each party gains from a transaction compared to how they would have fared without the transaction.

Capital Good(s)

The durable and costly non-labour inputs used in production (such as machinery and buildings). They do not include some essential inputs (such as air, water, and knowledge) that are used in production at zero cost to the user.

Game Theory

A branch of mathematics that studies strategic interactions, meaning situations in which each actor knows that the benefits they receive depend on the actions taken by all.

Technological Progress

A change in technology that reduces the amount of resources (labor, machines, land, energy, time) required to produce a given amount of the output.

Pareto Improvement

A change that benefits at least one person without making anyone else worse off.

Hawk-Dove Game

A coordination game in which the players want to coordinate on the opposite action from their opponent, and in each of the Nash equilibria, (Hawk, Dove) and (Dove, Hawk), the Hawk obtains the higher pay-off; but both players choosing Hawk is the worst outcome for both.

Reservation Indifference Curve

A curve that indicates combinations of goods that are as highly valued as one's reservation option.

Indifference Curve

A curve that joins together all the combinations of goods that provide a given level of utility to the individual.

Preferences

A description of the relative values a person places on each possible outcome of a choice or decision they have to make.

Dominant Strategy Equilibrium

A dominant strategy equilibrium is a nash equilibrium in which the strategies of all players are dominant strategies.

External Effects

A external effect occurs when a person action confers a benefit or imposes a cost on others and this cost or benefit is not taken into account by the individual taking the action. External effects are also called externalities.

Sequential Game

A game in which players do not all choose their strategies at the same time, and players who choose later can see the strategies already chosen by the other players. An example is the ultimatum game.

Ultimatum Game

A game in which the first player proposes a division of a 'pie' with the second player, who may either accept, in which case they give the division proposed by the first person, or reject the other, in which case, both players receive nothing.

Simultaneous Game

A game in which the players choose their strategies simultaneously, for example, the prisoners dilemma.

Coordination Game

A game in which there are two Nash equilibria, one of which may be Pareto superior to the other.

Invisible Hand Game

A game in which there is a single nash equilibrium that is pareto efficient may be called an invisible hand game.

Scarcity

A good is scarce if it is valued, and there is an opportunity cost of acquiring more of it.

Public Good(s)

A good that, if available to anyone, can be made available to everyone at no additional cost. This characteristic is called non-rivalry. Some economists define public goods more strictly as goods that are non-rival and non-exludable (non-exclidable means that it is impossible to prevent anyone from consuming them).

Developmental State

A government that takes a leading role in promoting the process of economic development through its public investments, subsidies of particular industries, education, and other public policies.

Isocost Line(s)

A line that represents all the combinations of inputs that cost a given total amount.

Market(s)

A market enables people to exchange goods and services by means of directly reciprocated transfers (unlike gifts), voluntarily entered into for mutual benefit (unlike theft, taxation), in a way that is often impersonal (unlike transfers among friends, family).

Gini Coefficient

A measure of inequality of a quantity such as income or wealth, varying from a value of zero (if there is no inequality) to one (if a single individual receives all of it). It is the average difference in, say, income between every pair of individuals in the population relative to the mean income, multiplied by one-half. Other than for small populations, a close approximation to the Gini coefficient can be calculated from a Lorenz curve diagram.

Gross Domestic Product (GDP)

A measure of the total output of goods and services in the economy in a given period. GDP combines in a single number, and with no double counting, all the output (or production) carried out by the firms, non-profit institutions, and government bodies within a government's territory. Household production is part of GDP if it is sold. GDP is measured monthly, quarterly, and annually.

Game(s)

A model of strategic interactions, meaning siutations in which each actor knows that the benefits they receive depend on the actions taken by all.

Nash Equilibrium

A nash equilibrium is an economic outcome where none of the individuals involved could bring about an outcome they prefer by unilaterally changing their own action. More formally, in game theory it is defined as a set of strategies, one for each player in the game, such as a players strategy is the best response to the strategies chosen by everyone else.

Veblen Effect

A negative effect on others that arises from a persons consumption of goods such as luxury housing, clothing, or vehicles, that display or signal social status.

Utility

A numerical indicator of value that one places on an outcome. Outcomes with higher utility will be chosen in preference to lower valued ones when both are feasible.

Entrepreneur

A person who creates or is an early adopter of new technologies, organizational firms, and other opportunities.

Convex Preferences

A person whose indifference curve has a convex shape - they get flatter as you move along the curve to the right of the diagram - is said to have convex preferences. The typical shape arises because when someone has more of one good (relative to another) they are willing to give up more of it in exchange for a unit of the other good: their marginal rate of substitution falls along the curve.

Endowments

A person's endowments are the things they have that enable them to receive income. They include physical wealth (for example: land, housing, machinery); financial wealth (for example: savings, stocks/shares, bonds); intellectual property (for example: patents, copyrights); knowledge, skills, abilities, and experience that affect labor income; citizenship and rights to work. They can include characteristics such as nationality, gender, race, and social class, if these affect their income.

Responder

A player who must accept or reject an offer made by the proposer.

Political System

A political system determines how governments will be selected, and how those governments will make and implement decisions that affect all or most members of a population.

Democracy

A political system that ideally gives equal political power to all citizens, and which is defined by individual rights such as freedom of speech, assembly, and the press; and fair elections in which virtually all adults are eligible to vote, and the government leaves office if it loses.

Reciprocity

A preference to be kind to or to help others who are kind and helpful, and to without help and kindness from people who are not helpful or kind.

Prisoner's Dilemma

A prisoners dilemma is a game that has a dominant strategy equilibrium, but also has an alternative outcome that gives a higher pay off to all players. So the nash equilibrium is not pareto efficient.

Constrained Choice Problem

A problem in which a decision-maker chooses the values of one or more variables to achieve an objective (such as maximizing profit, or utility) subject to a constraint that determines the feasible set (such as the demand curve or budget constraint).

Diminishing Average Product of Labour

A property of a production process in which, as the input of labor is increased, the amount of output per unit of labor (the average product) falls.

Public Good Game

A public good game is a game in which individual players can take an action that would be costly to themselves, but would produce benefits for all players (including themselves).

Stock

A quantity measured in a point of time, such as a firm's stock of capital goods, or the amount of carbon dioxide in the atmosphere. Its units do not depend on time.

Flow

A quantity measured per unit in time, such as weekly income, or annual carbon emissions.

Social Dilemma

A situation in which actions taken independently by individuals in pursuit of their own private objectives result in an outcome that is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals.

Correlation

A statistical association observed between two variables in a sample of data. If high values of one variable (e.g. people's earnings) commonly occur along with high values of another variable (e.g. years of education) the variables are positively correlated. When high values of one variable (e.g. air pollution) are associated with low values of the other variable (e.g. life expectancy) there is a negative correlation. If variables are correlated, it doesn't mean that there is a causal relationship between them: air pollution may not have caused the lower life expectancy we observed.

Dominant Strategy

A strategy that is dominant if it yields the highest pay off for the player, no matter what strategies the other players choose.

Fixed Proportions Technology

A technology that requires inputs in fixed proportions to each other. To increase the amount of output, all inputs must be increased by the same percentage so that they remain in the same fixed proportions to each other.

Utility Function

A utility function is a mathematical representation of a person's preferences for one or more goods. It gives numerical value to the amount of utility the person obtains from each possible combination of goods.

Quasi-Linearity

A utility function is said to be quasi-linear if it depends linearly on the amount of one good, and non-linearly on another. The marginal rate of substitution between the two goods then depends only on the non-linear variable.

Industrial Revolution

A wave of technological advances and organizational changes, that began in Britian in the 18th century; it transformed agricultural and craft-based economy into a commercial or industrial economy.

Economic System

A way of organizing the economy that is distinctive in its basic institutions. Economic systems of the past and present include: central economic planning (e.g. the Soviet Union in the twentieth century), feudalism (e.g. much of Europe in the early Middle Ages), slave economy (e.g. the US South and the Caribbean plantation economies prior to the abolition of slavery in the nineteenth century), and capitalism (most of the world's economies today).

Fairness

A way to evaluate an allocation based on ones conception of justice.

Pareto Dominated

Allocation A Pareto dominates allocation B if it is better according to the Pareto criterion. That is, one person would be strictly better off with A than B, and nobody would be worse off.

Altruistic Preferences

Altruism is a social preference: a person who is willing to bear the cost ot benefit somebody else is said to altruistic.

Strategy

An action (or action plan) that a person may choose, while being aware that the outcomes for themselves and others depend on their own strategy and the strategies chosen by others.

Pareto Efficient

An allocation if Pareto efficient if there is no feasible alternative allocation in which at least one person would be better off, and nobody worse off.

Evolutionary Economics

An approach that studies the process of economic change, which includes technological innovation, the diffusion of new social norms, and the development of novel institutions.

Firm

An economic organization in which private owners of capital goods hire and direct labour to produce goods and services for sale on markets to make a profit.

Natural Experiment

An empirical study that exploits a difference in the conditions affecting two populations (or two economies), that has occurred for external reasons: for example, differences in laws, policies, or weather. Comparing outcomes for the two populations gives us useful information about the effect of the conditions, provided that the difference in conditions was caused by a random event. But it would not help, for example, in the case of a difference in policy that occurred as a response to something else that might affect the outcome.

Budget Constraint

An equation that represents all combinations of goods and services one could acquire that would exactly exhaust one's budgetary resources.

Procedural Judgements of Fairness

An evaluation of an outcome based on how the allocation came about, and not on the characteristics of the outcome itself (for example, how unequal it is).

Substantive Judgements of Fairness

An evaluation of an outcome based on the characteristics of the allocation itself, not how it was determined.

Social Preferences

An individual is said to have social preferences if their individual utility depends on what happens to other people, as well as their own payoffs.

Institution(s)

An institution is a set of laws and informal rules that regulate social interactions among people, and between people and the biosphere; sometimes also termed 'rules of the game'.

Social Norms

An understanding that is most common to most members of a society about what people should do in a given situation when their actions affect others.

Consumer Goods

Any good that can be bought by consumers, including both short-lived and long-lived goods, which are called consumer durables.

Decile Groups

Deciles split a set of observations into ten equally-sized groups. The full set of observations is ordered according to a particular variable (e.g. income). The first decile group is the observations in the bottom 10% (e.g. the 10% with the lowest incomes), the second is the next lowest 10%, and the tenth or top decile group is the highest 10%. The deciles are the cutoff values that separate the groups; the first decile is the cutoff between the first and second decile groups, and so on.

Economics

Economics is the study of how people interact with each other and with their natural environment in producing and acquiring their livelihoods, and how this changes over time and differs across societies.

Goods

Economics use this word in a very general way, to mean anything an individual cares about and would like to have more of. As well as goods that are sold in the market, it can include (for example) 'free time' or 'clean air'.

Proposer

Endowed with a sum of money and chooses what proportion of the money to share with a 'responder'.

Consumption

Expenditure of consumer goods. Consumer goods include both short-lived goods and services, and long-lived goods, which are called consumer durables.

Allocation

In an economic interaction, an allocation is a particular distribution of goods or other things of value to all participants.

Best Response

In game theory, a players best response is the strategy that will bring about the players most preferred outcome, given the strategies adopted by the other players.

Minimum Acceptable Offer

In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. More generally in bargaining situations, it is the least favourable offer that would be accepted.

Income

Income, also known as disposable income, is the amount of profit, interest, rent, labor earnings, and other payments (including transfers from the government) received, net of taxes paid, measured over a period of time such as a year. Your income is the maximum amount that you could consume per period and leave your wealth unchanged.

Disposable Income

Income, also known as disposable income, is the amount of profit, interest, rent, labour earnings, and other payments (including transfers from the government) received, net of taxes paid, measured over a period of time such as a year. Your income is the maximum amount that you could consume per period and leave your wealth unchanged.

Creative Destruction

Joseph Schumpeter's name for the process by which old technologies and the firms that do not adapt will be swept away by the new, because they cannot compete in the market. In his view, the failure of unprofitable firms is creative because it releases labor and capital goods for use in new combinations.