Microeconomics

Peak Oil is a theoretical point in time after which the production of oil is expected to decline permanently because the industry has reached the maximum rate of extraction.

The result of the interaction between consumers and producers in a competitive market determines Supply and Demand equilibrium, price and quantity.

Demand is defined as the amount of good or service a consumer is willing and able to buy per period of time. It is essential to understand the term “willing and able.” Many people want to buy products that they cannot afford at prices they cannot pay.

The Decoy Effect or the Asymmetric Dominance Effect is a cognitive bias in which consumers will tend to have a specific change in preferences between two options when also presented with a third option that is asymmetrically dominated.

Price Elasticity of Supply is defined as the responsiveness of quantity supplied when the price of the good changes. It is the ratio of the percentage change in quantity supplied to the percentage change in price.

The Free Rider Problem occurs when there is a good (likely to be a public good) that everyone enjoys the benefits of without having to pay for the good. The free-rider problem leads to under-provision of a good or service and thus causes market failure.

The Marginal Rate of Substitution (MRS) is defined as the rate at which a consumer is ready to exchange a number of units good X for one more of good Y at the same level of utility.

An indifference curve depicts a line representing all the combinations of two goods that consumers place equal value. That is to say, they would be indifferent to either good.

An Inheritance Tax is a tax paid by the individual who inherits a deceased person’s property or money. Keep in mind that an inheritance tax is different from an estate tax. An estate tax is a tax imposed on a deceased individual’s assets.

There are two exceptions to the Law of Demand. Giffen and Veblen goods are exceptions to the Law of Demand. However, they are extreme cases and can be quite difficult to prove. But economists generally agree that there are rare cases where the Law of Demand is violated.

The Principal Agent Problem occurs when one person (the agent) is allowed to make decisions on the behalf of another person (the principal). In this situation, there are issues of moral hazard and conflicts of interest. Politicians and voters is an example of the Principal Agent Problem.

Decision Fatigue, a term created by social psychologist Roy F. Baumeister, refers to the deteriorating quality of decisions made by an individual, after continuously making decisions. Decision fatigue may also lead to consumers making poor choices with their purchases.

The Coase Theorem states “that when there are conflicting property right, bargaining between the parties involved will lead to an efficient outcome regardless of which party is ultimately awarded the property rights, as long as the transaction costs associated with bargaining are negligible.”

Intrinsic Value Theory (also known as the Theory of Objective Value) is any theory of value in economics which holds that the value of an object, good or service, is intrinsic or contained in the item itself.

The Lipstick Effect is the theory that when facing an economic crisis or the economy is in a recession, consumers will be more willing to buy less costly luxury goods. For example, instead of buying expensive fur coats, women will instead purchase expensive lipstick or luxury cologne.

Market Failures occur when there is a misallocation of resources, which results in distortions in the market. This distortion creates an inefficiency in the market.

Game theory is the study of rational behavior in situations involving interdependence. Game Theory is a formal way to analyze the interaction among a group of rational individuals who behave strategically.

There are three different Theories of Efficiency that we are going to focus on. The first Theory of Efficiency is Pareto efficiency or Pareto optimality. The second is the Kaldor–Hicks improvement, and lastly the Zero-profit condition or Zero Profit Theorem.