Econ 1

Front 1

Deadweight Loss (AKA ..)

Back 1

(Allocative Inefficiency) Loss in consumer and producer surplus when production is not occurring at the equilibrium point

Front 2

Allocative Efficiency

Back 2

A state of production where every good or service is produced to the point when marginal benefit of production (for producers) is equal to marginal benefit of consumption (for consumers).

Front 3

Pareto Efficiency + Conditions for Pareto Efficiency

Back 3

Outcome where no person's situation can be improved without hurting someone else.

1. Marginal benefit of the last item produced must equal its marginal cost

2. Marginal cost of production for all producers must be identical

3. Marginal benefit for all consumers must be identical

A competitive market in equilibrium is always pareto efficient.

Front 4

Externality (Negative or Positive)

Back 4

A situation where the costs of producing or benefits of consuming a good spill over onto those not producing or consuming the good.

Positive: Bees on a honey farm pollinate nearby crops

Negative: Oil spills from a tanker hurt nearby ecosystems affecting other industries

Front 5

Private Remedy (for externality)

Back 5

A procedure that eliminates or internalizes externalities without government action other than defining property rights

Front 6

Public Good

Back 6

A good or service with two characteristics:

1. Non-rivalry in consmption - Increased consumption of a good by one person does not decrease the amount available for consumption by others

2. Non-excludability - No one can be excluded from consuming a good

Front 7

Income Effect

Back 7

The effect by which demand for a good or service changes depending on the income of the consumer.

For example, for an inferior good, an increase in real income will lead to a decrease in demand for the good.

Front 8

Normal Good

Back 8

A good for which demand increases with income.

Front 9

Inferior Good

Back 9

A good for which demand decreases with income.

Front 10

Substitution Effect

Back 10

The effect where quantity demanded falls when price rises, exclusive of the income effect.

For example, when the price of a good rises, if a similar "substitute" exists, demand will fall for the more expensive good and will increase for the substitute. This is NOT a shift in the demand curve, but a MOVE to a more expensive section of the downward-sloping demand curve.

Front 11

Substitution Effect (Labor Supply)

Back 11

Wage is the price of leisure - due to the substitution effect, higher wages decrease demand for leisure (due to higher price)

Front 12

Income Effect (Labor Supply)

Back 12

Higher wages increase real income and worker's buying power for commodities such as leisure. Due to the income effect, increasing wages may cause workers to purchase more leisure time (work less).

Front 13

Efficient Market Hypothesis

Back 13

Markets adjust rapidly enough to eliminate profit opportunities immediately.

Front 14

Coupon on a Bond

Back 14

The fixed amount a borrower agrees to pay to the bondholder each year.

Front 15

Coupon Rate

Back 15

The rate that a borrower pays on the initial value of the bond. If the coupon rate is 5% and the initial value of the bond is $1000, the coupon on the bond is $50 / year.

Front 16

Marginal Tax Rate

Back 16

(Change in Total Tax) / (Change in Total Income)

OR

The marginal tax rate is the rate of tax that would be applied to income over a specified amount.

Front 17

Consumption Function

Back 17

The consumption function describes a consumer's willingness to consume as a function of their real income. It is a positive relationship.

Front 18

Monetary Policy Rule

Back 18

The rule used by the fed to determine how to set interest rates relative to adjusted inflation.

OR

How much instruments of monetary policy respond to measures of the state of the economy.

Front 19

Time Inconsistency

Back 19

Situation in which policy makers have the incentive to announce one economic policy but then change that policy after citizens have acted on the initial, stated policy.

Front 20

Value Added

Back 20

The value of a firm's production mins the value of intermediate goods used in production.

Front 21

Labor Force Participation Rate

Back 21

The labor force participation rate is the percentage of working-age, able laborers who choose to work.

Front 22

Marginal Propensity to Consume (MPL)

Back 22

A consumer's MPL is the increase in amount consumed per unit increase in income.

AND

The slope of the consumption function.

Front 23

Open Market Operation

Back 23

The buying or selling of bonds by the federal reserve intended to set overall market interest rates.

Front 24

Statistical Discrepancy (in computing GDP)

Back 24

Differences in statistical calculations resulting from different methods of calculating GDP (income method, expense method)

Front 25

Economies / Diseconomies of Scale

Back 25

The concept of diminishing (economies) / increasing (diseconomies) marginal costs as quantity of production increases.

Front 26

External Economies of Scale

Back 26

Growth in an industry causes ATC for the individual firm to fall because of some factor external to the firm.

Implies a downward-sloping lung-run industry supply curve.

Front 27

Competitive Equilibrium Model

Back 27

model that assumes utility maximization on the part of consumers and profit maximization on the part of firms, along with competitive markets and freely determined prices

Front 28

Competitive Market

Back 28

Individual firms have the power to affect market prices of a good

Front 29

Consumption Share

Back 29

Proportion of GDP used for consumption = C/Y

Front 30

Discretionary Fiscal Policy

Back 30

changes in tax / spending policy requiring legislative / administrative action by president / congress

Front 31

First Theorem of Welfare Economics

Back 31

competitive market results in an efficient outcome

Front 32

Forward-Looking Consumption Model

Back 32

People anticipate future income when deciding on consumption spending today

Front 33

Gini Coefficient

Back 33

Between zero - one. Ratio between Lorenz curve and the perfect equality line to the area between lines of perfect equality and perfect inequality

Front 34

GDP Deflator

Back 34

Nominal GDP / Real GDP - measures level of prices of goods and services included in real GDP relative to a given base year

Front 35

Price Shock

Back 35

change in price of key commodity such as oil, that causes a shift in the inflation adjustment line - also called supply shock

Front 36

Progessive Tax

Back 36

amount of individual's taxes rise as proportion of income as the person's income increases

Front 37

Proportional Tax

Back 37

amount of individual's taxes as proportion of income is constant as income rises

Front 38

Quantity Equation of Money

Back 38

Q * V = P * Y

Quantity * velocity = price level * GDP

Front 39

Definition of Money

Back 39

(1) a medium of exchange, (2) a store of value, and (3) aunit of account