Title: Theory / Unimportant / Human / Economics / Introduction - McCafee
Tags: hasSeenConjDef EquivalentButNoIntermediate LaTeXError addIntermediateCard examplesSwitchExample1 fromMath

Name: Economics
Definition: The study of allocation of scarce resource among people
Page: 5
Chapter: 1

Question: Why does economic consider only scarce resource ?
Answer: Absent scarcity, there is no significant allocation issue.
Page: 5
Chapter: 1

Name: Price of o
Definition: Quantity of money to exchange in order to obtain o
Page: 3
Chapter: 1
Variables: o a good or a service

Name: Factors in allocation exchange
Page: 5
Chapter: 1
Example: Price
Example2: convenience
Example3: Credit terms
Example4: Reliability, Trustworthiness

Name: Positive analysis
Definition: A study that aims to understand the world without value judgments.
Page: 4
Chapter: 1

Name: Normative analysis
Definition: A study that makes value judgments
Page: 4
Chapter: 1

Name: Cost-benefit analysis
Definition: A normative analysis that weighs the gains and losses to different individuals to determine changes that provide greater benefits than harm.
Page: 4
Chapter: 1

Name: Willingness-to-pay
Definition: The amount a customer is willing and able to pay for a good.
Page: 4
Chapter: 1

Name: Welfare analysis
Definition: A normative analysis that trades off gains and losses to different individuals.
Page: 4
Chapter: 1

Question: Policies that benefit everyone are
Answer: relatively uncontroversial.
Page: 4
Chapter: 1

Question: How to do cost-benefit analysis when there is no cost for some option ?
Answer: Consider instead the willingness-to-pay of the non-paying choices.
Page: 4
Chapter: 1

Name: A reservation price
Definition: The maximum willingness to pay for a good that most people buy consisting of one unit.
Page: 13
Chapter: 1

Name: Opportunity cost of \(t\)
Definition: The value that one foregoes in purchasing/undertaking \(t\)
Page: 5
Chapter: 1
Section: 2
Variables: \(t\) a thing
Definition2: The value of the best foregone alternative.
Name2: Cost of \(t\)

Name: Certainty equivalent of \(G\)
Definition: The amount of money that provides equal utility to the random payoff of \(G\)
Page: 6
Chapter: 1
Section: 2
Variables: \(G\) a gamble

Name: Risk management
Definition: Field devoted to studying the buying or selling of assets and options to reduce overall risk.
Page: 6
Chapter: 1
Section: 2

Name: Risk premium
Definition: The difference between the expected payoff and the certainty equivalent.
Page: 6
Chapter: 1
Section: 2

Name: Hedonic pricing
Definition: Method of valuation in which each item is first evaluated separately and then the item values are added together to arrive at a total value.
Page: 6
Chapter: 1
Section: 2

Question: How to evaluate life's value ?
Answer: How much one accept to pay to decrease death's risk by a fixed percent ?
Page: 6
Chapter: 1
Section: 2

Question: Absurd and tortured example of single change with multiple effect ?
Answer: government production of helium for (allegedly) military purposes reduces the cost of children’s birthday balloons, causing substitution away from party hats and hired clowns.
The reduction in demand for clowns reduces clowns’ wages and thus reduces the costs of running a circus. This cost reduction increases the number of circuses, thereby forcing zoos to lower admission fees to compete with circuses. Thus, were the government to stop subsidizing the manufacture of helium, the admission fees of zoos would likely rise, even though zoos use no helium.
Page: 6
Chapter: 1
Section: 3

Name: Ceteris Paribus
Definition: Latin for «Other things equal»
Page: 7
Chapter: 1
Section: 3

Name: Homo economicus
Definition: act in their self-interest
Page: 7
Chapter: 1
Section: 3
Conjdef: A person used in economic model, assumed to

Name: Self-interested behavior
Definition: Being entirely selfish
Page: 7
Chapter: 1
Section: 3
Context: Economics
Name2: Maximizing behavior

Name: sunk cost fallacy
Definition: A psychological tendency to invest more once one has made a significant nonrecoverable investment, even when subsequent investment isn’t warranted.
Page: 7
Chapter: 1
Section: 3
Example: Concorde
Name2: Throwing good money after bad
Example2: Watching a stinking movie to the end
Example3: Gambling more to recover money lost in first gambles

Question: Models helps by
Answer: removing extraneous details from a problem or issue, which allows one to analyze what remains more readily.
Page: 8
Chapter: 1
Section: 3

Name: Comparative static
Definition: A prediction that allows one to determine how one variable affects another, at least in the setting described by the model.
Page: 8
Chapter: 1
Section: 3

Question: Why do we still use homo economicus model ?
Answer: People often make decisions as families or households rather than as individuals, and it may be sensible to consider the household as the “consumer.” Identifying households as fairly selfish is more plausible perhaps than identifying individuals as selfish.
Page: 7
Chapter: 1
Section: 3
Answer2: Economics is mostly silent on why consumers want things. You may wish to make a lot of money to build a hospital or endow a library, which would be altruistic. Such motives are not inconsistent with self-interested behavior.
Answer3: Corporations are expected to serve their shareholders by maximizing share value, thus inducing self-interested behavior on the part of the corporation. Even if corporations could ignore the interests of their shareholders, capital markets would require them to consider shareholder interests as necessary condition for raising funds to operate and invest. In other words, people choosing investments for high returns will force corporations to seek a high return.
Answer4: There are good, as well as bad, consequences that follow from people acting in their self-interest, and it is important for us to know what they are.

Name: Marginal
Definition: The derivative of
Page: 7
Chapter: 1
Section: 3
Context: economics

Name: Consumer surplus
Definition: The value of consuming a good, minus the price paid.
Page: 9
Chapter: 2
Section: 1

Question: How to measure consumption ?
Answer: Units per period of time
Page: 9
Chapter: 2
Section: 1

Name: \(g\) has diminishing marginal value
Definition: the value of the last unit of \(g\) declines as the number consumed rises.
Page: 10
Chapter: 2
Section: 1
Variables: \(g\) a good

Name: The demand curve of \(g\)
Definition: The relation between price of \(g\) and the quantity demanded of \(g\)
Page: 10
Chapter: 2
Section: 1
Variables: \(g\) a good
Name2: The demand of \(g\)
Denoted by: \(x(p)\)

Smaller0: the supply curve
Greater0: the marginal cost
Page: 14
Chapter: 2
Section: 1
Variables: \(g\) a good
Smaller to greater: is the inverse of

Smaller0: the marginal value curve
Greater0: the demand function
Page: 10
Chapter: 2
Section: 1
Variables: \(g\) a good
Smaller to greater: is the inverse of

Name: The marginal value of \(q\)
Page: 10
Chapter: 2
Section: 1
Variables: \(q\) a quantity of some good
Notation: \(v(q)\)

Name: The consumer surplus for the quantity \(q\)
Definition: \(u(q)-p(q)\)
Page: 10
Chapter: 2
Section: 1
Variables: \(g\) a good,
\(A\) a person
\(p(q)\) the function associating a quantity of \(g\) to its cost
\(u_A(q)\) the function associating a quantity of \(g\) to its value for \(A\)
Definition2: In a consumer surplus graph, the surface of the area below a curve and above the price \(q\)
Definition3: [$$]\int_{p}^{\infty}x(y)\dd(y)[/$$] for \(x\) the demand curve
Abbreviation: \(CS\)
Intuition: Something \(A\) tries to maximizes, related to \(g\). \(A\)'s gains from trade.

Question: When demand for a good increase, how does the demand curve change ?
Answer: It goes up/to the right, that is, a greater value is given for the same quantity.
Page: 10
Chapter: 2
Section: 1

Name: Inferior good
Definition: Goods whose demand doesn’t increase with income
Page: 11
Chapter: 2
Section: 1

Name: Normal good
Definition: Goods whose demand increases with income
Page: 11
Chapter: 2
Section: 1

Name: A complement for \(x\)
Definition: A good whose consumption increases the value of \(x\)
Page: 11
Chapter: 2
Section: 1
Variables: \(x\) a good
Context: Economics
Example: A computer is a complement for printer and internet access
Property: Usually a symmetric relation.

Question: How and why units of \(g\) is treated ?
Answer: As continuous, to simplify mathematics.
Page: 10
Chapter: 2
Section: 1
Variables: \(g\) a good
Index: [2]

Name: A substitute for \(g\)
Definition: A good whose consumption decreases the value of \(g\)
Page: 11
Chapter: 2
Section: 1
Variables: \(g\) a good

Name: Supply
Definition: The function that gives the quantity offered for sale as a function of price.
Page: 14
Chapter: 2

Name: Supply curve
Definition: the prices on horizontal axis
Page: 14
Chapter: 2
Definition2: the number of units that will be supplied for this price on the vertical axis,
Conjdef: A curve with

Name: The profit obtained by selling \(q\) units
Definition: \(pq-c(q)\)
Page: 14
Chapter: 2
Variables: \(c(q)\) the cost of selling \(q\) units
\(p\)the price of an unit
Name2: Supplier profit for \(q\) units

Name: The maximum profit obtained by selling \(q\) units
Definition: A quantity \(q\) satisfying [$]0=\dv{pq-c(q)}{q}[/$]
Page: 14
Chapter: 2
Notation: \(q^*\)

Question: How to transform theory of supply and demand into a theory of demand alone ?
Answer: Assuming supply is a negative demand.
Page: 14
Chapter: 2

Name: An increase in supply
Definition: more units available at a given price
Page: 15
Chapter: 2
Definition2: lower price for the suppy of the same number of units
Conjdef: Either
Representation: graphically represented by a curve that is lower or to the right, or both; that is, to the southeast.

Smaller0: increase costs of production
Greater0: reduce the supply
Page: 15
Chapter: 2
Intermediate: increase marginal cost

Name: A complement in supply to \(x\)
Definition: an increase in the production of \(y\) increases the supply of \(x\)
Page: 15
Chapter: 2
Variables: \(x\) a good
Definition2: the cost of \(x\) falls as the amount produced of \(y\) rises
Example: lumber and wood chips
Conjdef: A good \(y\) such that
Example2: copper and gold, found in the same mine
Example3: Beef and leather

Name: A substitute in supply for \(x\)
Definition: A good \(y\) whose cost rises as the amount produced of \(x\) rises
Page: 15
Chapter: 2
Variables: \(x\) a good
Example: Civil and military aircraft
Example2: Wheat and corn (agriculture sharing the same lands in general)
Intuition: Something that the supplier could create if it was not creating \(x\)

Name: The market demand
Definition: The quantity purchased by all the market participants
Page: 17
Chapter: 2
Section: 3
Intuition: sum of individual demands

Name: The market supply
Definition: The sum of each individual supply curves
Page: 17
Chapter: 2
Section: 3

Name: Equilibrium price of o
Definition: Condition that occurs when the pressure for higher prices is balanced by the pressure for lower prices so that the current rate of exchange between buyers and sellers persists.
Page: 18
Chapter: 2
Section: 4
Variables: o an object
Context: Economy
Definition2: the price at which the quantity supplied equals the quantity demanded
Denoted by: p*

Name: A surplus of o
Definition: Condition in which the quantity supplied exceeds the quantity demanded.
Page: 18
Chapter: 2
Section: 4
Variables: o an object
Context: Economy

Question: What occurs when there is a surplus of o
Answer: Seller lower the price, the quantity demanded augment, and surplus disappear
Page: 18
Chapter: 2
Section: 4
Variables: o an object
Context: Economy

Question: What occurs when there is a shortage of o
Answer: Buyer raise the price they accept to pay, the quantity demanded decreases, and increase quantity supplied, eliminating the shortage
Page: 18
Chapter: 2
Section: 4
Variables: o an object
Context: Economy

Name: Shortage of o
Definition: Condition in which the quantity demanded of o exceeds the quantity supplied.
Page: 18
Chapter: 2
Section: 4
Variables: o an object
Context: Economy

Name: Efficient
Definition: Maximizing the gains from trade under the assumption that the only people affected by any given transaction are the buyers and the seller.
Page: 19
Chapter: 2
Section: 4
Context: Economy

Question: Why do people have and keep object which have a daily cost which is not optimal
Answer: Buying a more efficient object has a cost, which may be higher than the total extra cost created by the inefficient object
Page: 21
Chapter: 2
Section: 5
Context: Economy

Name: Hysteresis
Definition: Situation in which past choices influence current decisions.
Page: 21
Chapter: 2
Section: 5
Context: Economy
Example: A bought computer, car, fridge...

Name: Long run
Definition: Time period long enough that all inputs can be changed.
Page: 21
Chapter: 2
Section: 5
Context: Economy

Name: Short run
Definition: Time interval in which not all inputs can be changed.
Page: 21
Chapter: 2
Section: 5
Context: Economy

Name: Elasticity
Definition: The percentage change in one variable for a small percentage change in another.
Page: 25
Chapter: 3
Section: 1
Context: Economy
Definition2: \(-\frac{px'(p)}{x(p)}\) with \(p\) the price variable, and \(x\) the quantity purchased
Typ: Percent
Denoted by: [$]\varepsilon[/$]

Question: Why is elasticity measured using percent and not derivative ?
Answer: Because this allow to have a unit free value
Page: 25
Chapter: 3
Section: 1

Name: Consumer expenditure
Definition: Price times the quantity purchased
Page: 25
Chapter: 3
Section: 1
Definition2: \(px(p)\) with \(p\) the price variable, and \(x\) the quantity purchased
Name2: (individual) total revenue
Denoted by: \(TR\)

Name: Inelastic demand
Definition: A demand whose elasticity is less than 1
Page: 25
Chapter: 3
Section: 1

Name: Elastic demand
Definition: A demand whose elasticity is greater than 1
Page: 25
Chapter: 3
Section: 1