Behavioral Economics (2.4)
This concept assumes consumers have the time and cognitive ability to process all information to make an optimal choice.
What is rational consumer choice?
This measures the responsiveness of the quantity demanded of a good to a change in its price.
What is Price Elasticity of Demand (PED)?
These are goods like education or healthcare that provide positive benefits to society but are often under-consumed in a free market.
What are merit goods?
This market structure features a single dominant firm, high barriers to entry, and no close substitutes.
What is a monopoly?
This law states that there is an inverse relationship between the price of a product and the quantity demanded.
What is the law of demand?
These mental shortcuts, such as "anchoring" or "framing," often lead consumers to make choices that deviate from pure rationality.
What are biases?
A good that sees an increase in demand as consumer income rises is called a "normal good," but a good that sees a decrease is called this.
What is an inferior good?
This occurs when the social benefit of a good is greater than the private benefit at a given level of consumption.
What is a positive externality of consumption?
In this market structure, a few large firms are interdependent and may face an incentive to collude or risk a price war.
What is an oligopoly?
These goods are non-rivalrous and non-excludable, which leads to the "free rider problem."
What are public goods?
This term describes the human limitation in cognitive power and time that prevents people from being fully rational.
What is bounded rationality?
These types of goods, such as many primary commodities, typically have a PED value of less than one.
What are price inelastic goods?
These resources are rivalrous but non-excludable, often leading to over-consumption or the "Tragedy of the Commons."
What are common pool resources?
To maximize profit, a firm with market power will produce at the level of output where Marginal Cost (MC) equals this.
What is Marginal Revenue (MR)?
This government intervention sets a maximum price below the equilibrium, often to help low-income households.
What is a price ceiling?
This theory suggests that small suggestions or "choice architecture" can influence behavior without forbidding any options.
What is Nudge theory
This measures the responsiveness of the quantity of a good supplied to a change in its price.
What is Price Elasticity of Supply (PES)?
To correct negative externalities, governments may impose these "polluter pays" taxes.
What are Pigouvian (or carbon) taxes?
This market structure is characterized by many firms, free entry, and product differentiation.
What is monopolistic competition?
This market failure occurs when one party in a transaction has more or better information than the other, such as in "adverse selection."
These are specific ways choices are presented to consumers, such as default options or mandated choices.
What is choice architecture?
Mobility of factors of production and the amount of unused capacity are two major determinants of this elasticity.
What is Price Elasticity of Supply (PES)?
This condition is met when Marginal Social Benefit (MSB) equals Marginal Social Cost (MSC), maximizing community surplus.
What is allocative efficiency (or the socially optimum output)?
Monopolies are considered a market failure because they result in this, caused by higher prices and lower output compared to perfect competition.
What is welfare loss (or allocative inefficiency)?
The three functions of the price mechanism are signalling, incentive, and this.
What is rationing?