EMLE key terms

The rate at which a consumer will trade one good for another while keeping utility constant; equal to the slope of an indifference curve and, at an optimum, to the ratio of prices.

A set of consumption bundles that yield the same utility to a consumer. Curves are typically downward sloping and convex to the origin, and higher curves represent higher utility.

The set of bundles a consumer can afford given income and prices. Its slope is the negative ratio of prices, and the affordable set lies on or below the line.

An inferior good for which the income effect dominates the substitution effect, so quantity demanded rises when its price rises. Empirically rare and requiring a large income share.

The change in quantity demanded caused by the change in purchasing power when a price changes, holding relative prices fixed. Its sign depends on whether the good is normal or inferior.

The change in quantity demanded caused by a price change making one good relatively cheaper, holding utility constant. For a price fall it is always non-negative in quantity terms.

The rate at which one input can replace another while holding output constant; the absolute slope of an isoquant, equal to the ratio of marginal products at an interior optimum.

How output responds when all inputs are scaled proportionally. Constant returns double output when inputs double; increasing returns yield more, decreasing returns yield less.

The loss of total surplus from trades that do not occur because price diverges from marginal cost, for example under monopoly or a tax. It measures allocative inefficiency.

A state in which resources are allocated so that the marginal benefit of the last unit equals its marginal cost, maximising total surplus; no Pareto improvement through reallocation remains.

An allocation is Pareto efficient when no one can be made better off without making someone else worse off. It ranks allocations only on that criterion and says nothing about fairness.

A change is efficient if the gainers could in principle compensate the losers and still be better off, whether or not compensation is actually paid. It underlies cost-benefit analysis.

With zero transaction costs and clearly assigned rights, parties will bargain to an efficient allocation regardless of the initial entitlement; the rule then affects only distribution, not efficiency.

The costs of finding bargaining partners, negotiating, drafting, monitoring and enforcing agreements. When high, they block Coasean bargaining and make legal entitlements matter for efficiency.

Costs or benefits from an activity that fall on third parties not involved in the transaction. Negative externalities cause overproduction, positive ones underproduction, relative to the social optimum.

A tax set equal to the marginal external cost of an activity, so that private decision-makers internalise the harm and output falls toward the socially optimal level.

A legal family, rooted in Roman law and later codification, in which general statutory codes are the primary source and judges apply rather than create rules; precedent has weaker formal authority.

A legal family in which case law developed by judges is a primary source of rules, binding precedent governs later decisions, and statutes are interpreted against a background of accumulated case law.

The doctrine that courts should follow earlier decisions on the same point, giving precedent binding force. It promotes predictability but can entrench inefficient rules.

The claim that a country's legal family shapes its economic institutions and outcomes, for example that common law jurisdictions favour investor protection and market-friendly regulation more than civil law ones.

An entitlement protected by requiring the holder's consent before it can be taken; a court will enjoin infringement. Used where bargaining is feasible and the harm is hard to value.

An entitlement protected only by payment of damages assessed after the taking, so the taker may proceed without consent. Used where bargaining is impractical and valuation is feasible.

A deliberate failure to perform a contract when the gain to the breaching party exceeds the loss to the promisee, so breach plus expectation damages is more valuable than performance.

Compensation putting the innocent party in the position it would have occupied had the contract been performed. They encourage efficient breach but can under-protect reliance.

Compensation restoring the innocent party to its pre-contract position by reimbursing costs incurred in reliance on the promise. They protect sunk reliance but not expected profit.

A negligence test comparing the burden of precaution B with the expected accident loss P times L; a defendant is negligent when B is less than P multiplied by L.

Liability for harm regardless of the level of care taken. It gives injurers strong incentives to reduce activity levels and is common where harm is caused by abnormally dangerous activity.

A situation in which an agency meant to regulate an industry instead serves the interests of the firms it oversees, often because of information advantages and revolving-door career incentives.

The view that regulation corrects market failures such as monopoly power, externalities or information asymmetries in order to serve the general welfare rather than private interests.

An industry where declining long-run average cost over the relevant demand range makes a single supplier cheapest, so competition wastes resources and price regulation is often preferred.

A concentration measure equal to the sum of squared market shares, ranging from near zero to 10,000. Higher values indicate a more concentrated market and greater merger scrutiny.

The markup measure equal to price minus marginal cost, divided by price. It ranges from zero under perfect competition toward one under monopoly and indexes market power.

The product and geographic scope within which competition is assessed, defined by demand and supply substitutability, for example a small but significant non-transitory price increase test.

A profile of strategies in which no player can gain by unilaterally changing strategy, given the others' choices. It may be inefficient, as in the prisoner's dilemma.

A strategy that yields a payoff at least as good as any other regardless of what opponents do. When every player has one, the outcome is a dominant-strategy equilibrium.

A game where each player's individually rational choice leads to an outcome worse for both than mutual cooperation, illustrating tension between private and collective rationality.

A result is statistically significant when the probability of observing it, or something more extreme, under the null hypothesis falls below a chosen threshold, conventionally five percent.

Rejecting a true null hypothesis, a false positive. Its probability is the significance level chosen by the researcher, conventionally five percent.

A range of values, computed from sample data, that would contain the true parameter in a stated proportion of repeated samples. Its width shrinks as sample size grows.