Utility function - ANSWER-a mathematical mapping of individual choices over goods
into their level of well-being
Models - ANSWER-show preferences and budget constraint
Indifference curve - ANSWER-a curve that shows all combinations of consumption that
give the individual the same amount of utility (and so among which the individual is
indifferent)
Marginal utility - ANSWER-the additional increment to utility from consuming an
additional unit of a good
Slope of the indifference curve - ANSWER-the rate at which a consumer is willing to
trade off the good on the vertical axis for the good on the horizontal axis (MRS)
Marginal rate of substitution - ANSWER-The rate at which a consumer is willing to trade
one good for another
a ratio of marginal utilities
Budget constraint - ANSWER-A mathematical representation of all the combinations of
goods an individual can afford to buy if she spends her entire income.
Substitution effect - ANSWER-Holding utility constant, a relative rise in the price of a
good will always cause an individual to choose less of that good
Income effect - ANSWER-A rise in the price of a good will typically cause an individual
to choose less of all goods because her income can purchase less than before.
Welfare economics - ANSWER-The study of the determinants of well-being, or welfare,
in society.
Elasticity of demand - ANSWER-the percentage change in quantity demanded for each
percentage change in prices
Vertical demand curve - ANSWER-perfectly inelastic
Horizantal demand curve - ANSWER-perfectly elastic
Cross-price elasticity - ANSWER-The effect of one good's price on the demand for
another good
, Production function - ANSWER-measures the impact of firm input use on firm output
levels
Marginal productivity - ANSWER-The impact of a one-unit change in any input, holding
other inputs constant, on the firm's output.
Marginal cost - ANSWER-The incremental cost to a firm of producing one more unit of a
good.
Profit - ANSWER-The difference between a firm's revenues and costs, maximized when
marginal revenues equal marginal costs.
Market equilibrium - ANSWER-The combination of price and quantity that satisfies both
demand and supply, determined by the interaction of the supply and demand curves.
Social efficiency - ANSWER-the net gains to society from all trades that are made in a
particular market, and it consists of two components: consumer and producer surplus
Consumer surplus - ANSWER-The benefit that consumers derive from consuming a
good, above and beyond the price they paid for the good
Producer surplus - ANSWER-The benefit that producers derive from selling a good,
above and beyond the cost of producing that good.
First Fundamental Theorem of Welfare Economics - ANSWER-The competitive
equilibrium, where supply equals demand, maximizes social efficiency.
Deadweight loss - ANSWER-The reduction in social efficiency from preventing trades
for which benefits exceed costs.
Social welfare - ANSWER-the level of well-being in a society, is determined both by
social efficiency and by the equitable distribution of society's resources
Second Fundamental Theorem of Welfare Economics - ANSWER-Society can attain
any efficient outcome by suitably redistributing resources among individuals and then
allowing them to freely trade.
Equity-efficient trade-off - ANSWER-The choice society must make between the total
size of the economic pie and its distribution among individuals.
Social welfare function - ANSWER-A function that combines the utility functions of all
individuals into an overall social utility function.
Utilitarian social welfare function - ANSWER-society's goal is to maximize the sum of
individual utilities
Commodity egalitarianism - ANSWER-The principle that society should ensure that
individuals meet a set of basic needs, but that beyond that point income distribution is
irrelevant
Randomized trial - ANSWER-The ideal type of experiment designed to test causality,
whereby a group of individuals is randomly divided into a treatment group, which
receives the treatment of interest, and a control group, which does not.
Control group - ANSWER-The set of individuals comparable to the treatment group who
are not subject to the intervention being studied.
Bias - ANSWER-Any source of difference between treatment and control groups that is
correlated with the treatment but is not due to the treatment.
Attrition - ANSWER-Reduction in the size of samples over time, which, if not random,
can lead to biased estimates.
Observational data - ANSWER-Data generated by individual behavior observed in the
real world, not in the context of deliberately designed experiments.
Time series analysis - ANSWER-Analysis of the comovement of two series over time.
into their level of well-being
Models - ANSWER-show preferences and budget constraint
Indifference curve - ANSWER-a curve that shows all combinations of consumption that
give the individual the same amount of utility (and so among which the individual is
indifferent)
Marginal utility - ANSWER-the additional increment to utility from consuming an
additional unit of a good
Slope of the indifference curve - ANSWER-the rate at which a consumer is willing to
trade off the good on the vertical axis for the good on the horizontal axis (MRS)
Marginal rate of substitution - ANSWER-The rate at which a consumer is willing to trade
one good for another
a ratio of marginal utilities
Budget constraint - ANSWER-A mathematical representation of all the combinations of
goods an individual can afford to buy if she spends her entire income.
Substitution effect - ANSWER-Holding utility constant, a relative rise in the price of a
good will always cause an individual to choose less of that good
Income effect - ANSWER-A rise in the price of a good will typically cause an individual
to choose less of all goods because her income can purchase less than before.
Welfare economics - ANSWER-The study of the determinants of well-being, or welfare,
in society.
Elasticity of demand - ANSWER-the percentage change in quantity demanded for each
percentage change in prices
Vertical demand curve - ANSWER-perfectly inelastic
Horizantal demand curve - ANSWER-perfectly elastic
Cross-price elasticity - ANSWER-The effect of one good's price on the demand for
another good
, Production function - ANSWER-measures the impact of firm input use on firm output
levels
Marginal productivity - ANSWER-The impact of a one-unit change in any input, holding
other inputs constant, on the firm's output.
Marginal cost - ANSWER-The incremental cost to a firm of producing one more unit of a
good.
Profit - ANSWER-The difference between a firm's revenues and costs, maximized when
marginal revenues equal marginal costs.
Market equilibrium - ANSWER-The combination of price and quantity that satisfies both
demand and supply, determined by the interaction of the supply and demand curves.
Social efficiency - ANSWER-the net gains to society from all trades that are made in a
particular market, and it consists of two components: consumer and producer surplus
Consumer surplus - ANSWER-The benefit that consumers derive from consuming a
good, above and beyond the price they paid for the good
Producer surplus - ANSWER-The benefit that producers derive from selling a good,
above and beyond the cost of producing that good.
First Fundamental Theorem of Welfare Economics - ANSWER-The competitive
equilibrium, where supply equals demand, maximizes social efficiency.
Deadweight loss - ANSWER-The reduction in social efficiency from preventing trades
for which benefits exceed costs.
Social welfare - ANSWER-the level of well-being in a society, is determined both by
social efficiency and by the equitable distribution of society's resources
Second Fundamental Theorem of Welfare Economics - ANSWER-Society can attain
any efficient outcome by suitably redistributing resources among individuals and then
allowing them to freely trade.
Equity-efficient trade-off - ANSWER-The choice society must make between the total
size of the economic pie and its distribution among individuals.
Social welfare function - ANSWER-A function that combines the utility functions of all
individuals into an overall social utility function.
Utilitarian social welfare function - ANSWER-society's goal is to maximize the sum of
individual utilities
Commodity egalitarianism - ANSWER-The principle that society should ensure that
individuals meet a set of basic needs, but that beyond that point income distribution is
irrelevant
Randomized trial - ANSWER-The ideal type of experiment designed to test causality,
whereby a group of individuals is randomly divided into a treatment group, which
receives the treatment of interest, and a control group, which does not.
Control group - ANSWER-The set of individuals comparable to the treatment group who
are not subject to the intervention being studied.
Bias - ANSWER-Any source of difference between treatment and control groups that is
correlated with the treatment but is not due to the treatment.
Attrition - ANSWER-Reduction in the size of samples over time, which, if not random,
can lead to biased estimates.
Observational data - ANSWER-Data generated by individual behavior observed in the
real world, not in the context of deliberately designed experiments.
Time series analysis - ANSWER-Analysis of the comovement of two series over time.
