microecon final eam

• import

  to buy goods or services from foreign sellers
• export

  to sell goods or services to foreign buyers
• trade costs

  the extra cost incurred as a result of buying or selling internationally rather than domestically
• what do trade costs determine?

  determines whether its worth buying or selling internationally
• high trade costs ...

  ... not worth it
• low trade costs ...

  ... worth it
• as trade costs fall ...

  ... companies trade more intermediate inputs, operating global chains
• sources of comparative advantage


  - abundant inputs

  - specialized skills

  - mass production
• world price

  the price that a product sells for in a global market
• what is determined by the world price?

  world supply and demand
• domestic demand curve

  shows the quantity of a good that all domestic consumers added together plan to buy at each price
• domestic supply curve

  shows the quantity of a good that all domestic suppliers added together plan to sell at each price
• lower price imports raise ...

  ... consumer surplus
• more expensive exports raise ...

  ... producer surplus
• tariff

  a tax on imported goods

  (increases trade costs)
• effects of tariffs

  - price: up

  - qt. demanded: down

  - qt. supplied: up

  = imports: down
• import quota

  limit on the quantity of a good that can be imported

  (doesn't raise revenue)
• globalization

  the increasing economic, political, and cultural integration of different countries
• relative abundant inputs

  - lower opportunity costs

  - sells what you have a lot of and buy what you don't
• specialized skills

  even when land, labor, and capital are all similar, better production techniques will lower your opportunity cost
• mass production

  - allows incredibly specialized production lines

  - bargaining power for buying inputs
• private information

  when one party to a transactions knows everything/something and the other doesn't

  - aka: asymmetric information
• adverse selection of sellers

  tended for the mix of goods to be skewed toward more low quality goods when buyers can't observe quality
• solution to adverse selection of sellers

  - buyers can learn from third party verifiers

  - sellers can signal their products quality

  - government can increase or weed out low quality goods
• signal

  an action taken to credibly convey information that is hard for someone else to verify
• adverse selection of buyers

  tendency for the mix of buyers to be skewed toward more high costs buyers when sellers don't know buyers type
• actuarially fair

  an insurance policy, that on average, is expected to pay out as much in compensation as it reactivates
• solutions to adverse selection of buyers

  - sellers can use information that is related to buyer's likely cost

  - sellers can offer different contracts so that buyers sort themselves

  - government can increase information or directly reduce adverse selection
• moral hazard

  the actions you take, because they are not fully observable and you are partially insulated from their consequences
• principal agent problem

  the problems that arise when a principal hires an agent to do something on their behalf, but the principal cannot perfectly observe the agents actions
• pay for performance

  linking the income your workers earn to measures of their performance: commission, price rates, bonuses, etc
• rational ignorance

  search for more information until the marginal cost = expected marginal benefit
• risk premium

  higher return on risky investment or lower price of risky products
• risk is a set of ...

  probabilities and payoffs
• fair bet

  a gamble, that one average, will leave you with the same amount of money
• risk averse

  disliking uncertainty
• utility

  measure of well being
• marginal utility

  the additional utility you get from one more dollar
• diminishing marginal utility

  each additional dollar yield a smaller boost to your utility - that is, less marginal utility - than the previous dollar
• diminishing marginal utility makes you ...

  ... risk averse