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39 Cards in this Set
- Front
- Back
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Rise of machine-driven capital goods using steam power that appeared initially in Britain near the end of the 1700s. Led to sharply higher rates of economic growth as it spread from country to country.
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Industrial Revolution
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Process whereby technological progress causes backward firms to go out of business. Initially described by Joseph Schumpeter
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Creative Destruction
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A market economy that has functioning markets for all things that provide utility to people. A condition for an economy in general equilibrium to be Pareto Optimal (efficient).
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Complete
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Attempts of firms to maximize profits by expanding market shares through marketing activities and lowering their costs of production, supposedly generating efficiency. Pure competition implies many buyers and sellers, free entry and exit, homogeneous products, and full information.
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Competition
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All markets are in equilibrium.
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general Equilibrium
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One market or a subset of markets are in equilibrium.
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partial Equilibrium
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Maximum set of a combinations of goods that a society can produce at a specific time, given its resources and technology.
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Production Possibilities Frontier (ppf)
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Phrase used metaphorically by Adam Smith to describe the allocative workings of market forces.
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Invisible Hand
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Idea that a market might be inefficient, usually because of the presence of monopoly power, externalities, public goods, or incomplete information.
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Market failure
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Part of the net benefit to producers, consisting of earnings that did not have to be paid in order to create output. In the usual supply-and-demand case, the area between the price line and the marginal cost curve.
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Producer Surplus
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Net benefit to the consumer, amount desired and gained without being paid for, measured by the area under the demand curve and above the price line in standard supply-and-demand analysis
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Consumer Surplus
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Extra income a monopolist gains from consumers as a result of charging higher prices for smaller supplies compared with a competitive market.
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Monopoly Rent
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Situation where only one firm in an industry survives because of economies of scale or control of a scarce resource.
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Natural Monopoly
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Market structure with many firms, free entry and exit, but product heterogeneity or differentiation allowing monopoly power for firms.
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Monopolistic Competition
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Market structure in which there is a small number of firms, each able to follow and respond to what the others are doing individually.
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Oligopoly
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The theorem that the long-run equilibrium for monopolistic competition implies
firm production levels lower than those that would generate minimum short-run average costs and therefore are inefficient. |
Excess Capacity Theorem
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Oligopolistic firms acting together as if they were a single monopolist, leading to a cartel. Unstable system because of the prisoner’s dilemma of game theory, in which an agent can gain more by not cooperating with others.
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Perfect Collusion
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Oligopolistic markets characterized by ultra free entry and exit. Argued to mimic the price and output of competitive markets.
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Contestable Markets
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Fundamental antitrust law of the United States, which forbids “combinations in restraint of trade” and “efforts to monopolize markets.”
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Sherman Act of 1890
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Group of allied companies in Japan, usually linked through a bank. Major keiretsus contain both vertical and horizontal elements. Considered to be the central structure of Japanese industrial organization.
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Keiretsu
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Korean corporate form combining many subsidiary firms from many sectors into a single firm. Resembles the earlier Japanese zaibatsu, but without a bank as part of it.
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Chaebol
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An effect that one party generates on other parties but does not experience personally.
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negative Externality
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An externality that generates net benefits for the affected parties but not for the generator
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positive Externality
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Failure of private markets to provide public goods or resolve some externalities, which can make a general equilibrium be inefficient (not Pareto Optimal).
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Incompleteness of Markets
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Idea of Ronald Coase of the University of Chicago that if property rights are well defined and enforced and transactions costs are minimal, then the free market can internalize externalities efficiently.
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Coase Theorem
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Market-based solution to pollution problems used in the United States to reduce sulfur dioxide emissions. Government sets the total amount of pollution allowed and then lets firms trade rights to pollute up to that amount. Properly structured, is the lowest-cost way to attain a given cleanup level.
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Tradable Pollution Permits
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Goods that no one can be excluded from consuming. Subject to the free rider problem when privately provided. Usually called public goods.
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Collective Consumption Goods
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Inability to exclude individuals from consuming collective consumption goods (public goods) means that it is hard to privately provide these goods as people can consume them without paying for them, becoming free riders.
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Free Rider Problem
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View that the appropriate unit of economic analysis is the individual, with the strong version arguing that social aggregates are unreal
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Methodological Individualism
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School of economic thought associated with James Buchanan and Gordon Tullock, also known as the Virginia School. Studies the behavior of government agencies, assuming that they maximize their own power and budgets and please the special interests supporting them. Generally pro-laissez-faire and allied with the Chicago School ideologically.
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Public Choice
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A situation in which one of two parties in a transaction knows more than the other. A source of inefficiency in centrally planned economies between planners and enterprise managers, as well as in many financial and insurance markets in capitalist economies. Source of the principal-agent problem.
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Asymmetric Information
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Crucial problem arising from asymmetric information involving relations between someone (principal) hiring someone else (agent) who knows more than the principal about how to do something, seen as a widespread problem in many economic situations. In planned economies, enterprise managers are the agents, who do not always do what the planner principals tell them to do.
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Principal-Agent Problem
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Problem arising from asymmetric information in insurance markets when those who are insured behave recklessly because they are insured, a problem in financial markets as well.
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Moral Hazard
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Labor union activity focused on immediate economic gains from businesses within the existing capitalist system rather than revolution. It may seek reforms within the system, with the U.S. American Federation of Labor–Council of Industrial Organizations (AFL–CIO) being a main example.
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Business Unionism
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Society with centralized wage bargaining.
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Corporatism
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Named for the British economist John Maynard Keynes. Believes that the macroeconomy is not automatically self-stabilizing and may need government intervention to stabilize it, in contrast with the Classical School.
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Keynesian School
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School of economics that believes that the macroeconomy is self-stabilizing, that a steady policy minimizing inflation should be in place with free markets and all will go well, in contrast to the Keynesian school. However, Marxists also consider themselves to be classical. More generally, an approach to economics prior to the neoclassical revolution of the 1870s
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Classical School
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Strongly pro-laissez-faire view of economics advocated by many associated with the University of Chicago, such as Milton Friedman. Accepts neoclassical equilibrium theory.
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Chicago School
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Idea associated with the Public Choice school that government bureaucrats generate artificial monopolies creating monopoly rents that can then be captured by special interests. More precisely, the pursuit of such possibilities by special interests is rent-seeking activity.
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Rent-Seeking
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