EMLE flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Marginal rate of substitution

The rate at which a consumer will trade one good for another while keeping utility constant; at an optimum it equals the ratio of prices, giving the tangency condition of consumer choice.

Giffen good

An inferior good whose income effect outweighs the substitution effect, so quantity demanded rises when its price rises. Requires a large budget share and few substitutes.

Lerner index

The markup measure (P − MC)/P. For a profit-maximizing firm it equals the inverse of the absolute price elasticity of demand, so market power rises as demand becomes less elastic.

Deadweight loss of monopoly

The welfare loss from pricing above marginal cost, equal to the area between the demand curve and marginal cost over units not produced. It measures lost gains from trade.

Cournot equilibrium

In quantity competition, each firm chooses output best responding to rivals' outputs. Equilibrium output lies between monopoly and perfect competition, with prices above marginal cost.

Economies of scale

A situation where long-run average cost falls as output rises, often due to fixed costs or specialization. It can create natural monopoly and is distinct from returns to scale in production.

Coase theorem

With zero transaction costs and clear property rights, parties bargain to an efficient outcome regardless of the initial entitlement. The rule affects who pays, not efficiency.

Kaldor-Hicks efficiency

A change is efficient if total gains exceed total losses, so winners could in principle compensate losers. It is weaker than Pareto efficiency because compensation need not actually occur.

Pigouvian tax

A tax set equal to the marginal external cost of an activity, aligning private incentives with social cost. It is a price-based remedy for externalities, contrasted with property-rule bargaining.

Hand formula

A negligence standard holding a party liable when the burden of precaution B is less than the probability P times the loss L. It operationalizes cost-benefit analysis of care.

Property rule versus liability rule

A property rule requires consent before an entitlement can be taken; a liability rule allows taking against objectively set compensation. Choice depends on transaction costs and valuation difficulties.

Reciprocity of harm

The idea that externalities involve competing uses, so the legal question is which activity should bear the cost rather than who caused the harm. It underlies Coasean analysis.

Codification

The systematic reduction of legal rules into an authoritative code, characteristic of civil law systems. It aims at completeness and accessibility but still requires judicial interpretation.

Stare decisis

The common law doctrine that courts follow prior decisions of equal or higher courts. It provides predictability and consistency while allowing gradual doctrinal development.

Inquisitorial versus adversarial procedure

Inquisitorial procedure has the court drive fact-finding and evidence; adversarial procedure has parties present and contest evidence before a passive judge. The contrast is a matter of degree.

Legal origins theory

The claim that common law and civil law traditions differ in investor protection and market outcomes. The evidence is correlational and the causal interpretation is contested.

Legal transplant

The adoption of rules or institutions from another legal system. Outcomes vary because transplanted rules interact with local institutions and path-dependent practices.

Efficient breach

Breach is efficient when the promisor's cost of performance exceeds the promisee's benefit. Expectation damages make the promisor internalize the promisee's loss.

Expectation damages

A contract remedy putting the promisee in the position as if the contract had been performed. It covers lost profits and is the default remedy for breach.

Hadley v Baxendale rule

Damages are limited to losses foreseeable at contracting or within the parties' contemplation. The rule caps liability and encourages disclosure of unusual risks.

Majoritarian default rule

A gap-filling contract term set to what most similarly situated parties would have chosen. It saves drafting costs and reduces the need for negotiation.

Strict liability versus negligence

Strict liability makes the injurer bear all accident costs; negligence imposes liability only when care falls below a standard. The efficient choice depends on who is the cheaper cost avoider.

Tragedy of the commons

Open-access resources are overused because each user ignores the congestion cost imposed on others. Privatization, quotas, or self-governance can align incentives.

Samuelson condition

For a public good, efficient provision requires the sum of marginal benefits across users to equal marginal cost. Non-rivalry means one unit serves everyone.

Price-cap regulation

A regulatory cap on prices, often indexed as RPI minus X. It gives the firm incentives to cut costs and keep gains during the regulatory period.

Averch-Johnson effect

Rate-of-return regulation can induce a firm to overinvest in capital to expand its rate base. It is an inefficiency of cost-of-service regulation.

SSNIP test

A small but significant non-transitory increase in price test used to define relevant markets. It asks whether a hypothetical monopolist could profitably raise price.

Herfindahl-Hirschman index

The sum of squared market shares, used as a concentration measure in merger review. Higher values indicate a more concentrated market and more concern.

Backward induction

Solving a sequential game by reasoning from the last mover's optimal action back to the first. It yields subgame-perfect equilibria and exposes incredible threats.

Prisoner's dilemma

A game where each player's dominant strategy yields a Pareto-inferior outcome. Cooperation can be sustained in repeated play with sufficiently patient players.

Omitted variable bias

Bias in an estimated coefficient when a relevant variable is correlated with both the included regressor and the outcome. It distorts causal interpretation of regression results.

Thesis statement

A single contestable claim that an essay defends. It should be specific, falsifiable, and supported by evidence and reasoning throughout the argument.