The change in consumption that results when a price change moves the consumer to a higher or lower indifference curve. Substitution effect – T he change in consumption that results when a price change moves the consumer along a different indifference curve to a point with a new MRS.
Giffen good – A good for which an increase in price raises the Qd (violates the law of demand).CHAPTER TWENTY-TWOMoral Hazard– Tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior (working on commission would decrease this). After transaction.Agent– Person who is performing an act for another person (principal).Principal – The person for whom the agent is performing some act. Adverse Selection– Tendency for the mix of unbserved attributes to become undesirable from the standpoint of an uninformed party. It's a problem that arises in markets where the seller knows more about the good than the buyer does (used cars, labor market, insurance). Before transaction. Health insurance – because people with greater hidden health problems are more likely tobuy insurance, the cost of insurance reflects the cost of a sicker than average person.Signaling – The action taken by an informed party to reveal private information to an uninformed party (superbowl adverts, so much money to advertise they must have a goodproduct). Screening –Action taken by an uninformed party to induce an informed party to reveal information. Condorcet paradox – Failure of majority rule to produce transitive preferences for society. One implication is that the order on which things are voted can affect the result. Setting the agenda can have a powerful impact on the outcome of a democratic election, so that the majority voting by itself doesn't tell us what a society really wants. Arrow's impossibility theorem – Mathematical result showing that under certain assumed conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences. I.E. No voting system will be perfect. Unanimity – If everyone prefers A, then A should beat B.Transitivity – If A beats B, and B beats C, then A should beat C. independence of irrelevant alternatives– Ranking between any two outcomes A and B shouldn't depend on whether some outcome C is also available. No dictators– There is no person that always gets his way regardless of everyone else's preferences. The Median Voter theoremMathematical result showing that if voters were choosing a point along a line, and each wants the point closest to his most preferred point, then the majority rule will pick the most preferred point of the median voter. Politicians are animals .
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