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26 Cards in this Set
- Front
- Back
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Market Failure Due to... |
1. Public Goods 2. Externalities 3. Market Power 4. Inequity - Income Distribution |
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Anti-Trust Laws |
1.) Sherman Act (1890) - Pretty much states that you can't enter a market without competition (monopoly) or you will be fined up to $1 million.
2.) Clayton Act (1914) - Outlaws specific anti-trust behavior not covered by the Sherman Act. Includes some prevention of development of monopolies.
3.) Federal Trade Commission Act (1914) - Created an agency to study industry structures and behavior. |
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Economics of Gov't Failure |
1. Special Interest Effect - Concentrated benefits, diffused costs
2. Voting is not a rational act - voters are "rationally ignorant"
3. 1-person, 1-vote
4. Vote for bundles of "goods" / platform
5. Gov't is a crisis manager
6. No incentives for internal efficiency. |
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Demand for Labor by Firms |
A firm's demand for labor is a derived demand, derived from the demand for the firm's product. |
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Value of the Marginal Product of Labor (VMPL) |
Value of the marginal product of labor. |
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Marginal Revenue Product of Labor (MRPL) |
The extra revenue obtained from selling the output of an additional worker. |
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Marginal Factor Cost (MFC) |
The change in expenditure on labor needed to hire 1 additional worker. |
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why wages differ... |
1. Workers are not the same - different skills, worker preferences, discrimination.
2. Jobs are not equally attractive - location, when you work, working environment, benefits, distance from home, danger, cost of living, etc...
3. Workers are not perfectly mobile - there are costs involved when one moves. |
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Monetary Tools |
1. Open Market Operations - Fed buys bonds to increase the money supply and sells them to decrease money supply.
-Actual increase in money supply may be less than potential because... 1. Banks may hold on to excess reserves 2. Individuals taking loans might not deposit all funds into a bank.
2. Changes in reserve requirement (Excess reserves) x 1/reserve requirement
3. Change in discount rate - the interest rate charged by the FED for lending to private banks - a raised discount rate would decrease money supply and a decreased discount rate would increase money supply.
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What is aggregate demand?
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The quantity of output demanded at alternative price levels in some time period, holding all else constant. |
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Four Major Components of Aggregate Demand? |
1. Consumption 2. Investment 3. Gov't Spending 4. Net exports (Exports - imports) |
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Changes in aggregate demand |
1. Changes in real wealth: Ownership of stock and housing
2. Changes in real interest rate - if rates go down it will spur purchases of major appliances and durables, and increase business spending on capital goods.
3. Optimism about the future will stimulate business spending.
4. changes in the expected rate of inflation - more inflation implies spending now to avoid future inflation.
5. Changes in incomes abroad.
6. Changes in exchange rates, dollar deprecates, exports go up, AD will go up. |
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Why is aggregate demand downward sloping? |
1. Real balances effect - lower prices make you wealthier
2. interest rate effect - lower prices will reduce the demand for money + lower real interest rates.
3. Foreign trade effect - lower domestic prices means less consumption of imports and more exports. |
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Nominal and Real GDP |
Nominal GDP - the value of all goods and services produced valued at current prices.
Real GDP - uses the same set of prices across time periods to facilitate comparisons. |
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Different types of unemployment? |
Frictional - The time period between jobs when a worker is searching for a new job or transitioning from one job to another.
Seasonal - an elevated level of unemployment due to seasonal changes.
Structural - When people are looking for jobs, but there aren't enough.
Cyclical - When the economy is bad, there are less jobs. When economy is good, there are more jobs. |
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what is natural rate of unemployment? can employment ever exceed "full" employment? |
-natural rate is the rate of unemployment when the labor market is in equilibrium due to structural, seasonal, and frictional unemployment.
-If the unemployment rate is lower than the natural unemployment (equilibrium labor), then you're past full employment.
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Difference between Fiscal and Monetary policy? |
Fiscal - President + Gov't act to increase aggregate demand by either increase gov't expenditures or lowering taxes, or both.
Monetary - The federal reserve can affect the money supply, interest rates, and aggregate demand. |
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What factors contribute to the independence of the FED? Why is FED independence important? |
-FED have there own funds, not dependent on Congress for money, not audited by the GAO
-Independence means they are not subject to political whims (boosting economy prior to an election, for example). |
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Theory of Compensating wage differences |
Wage differences of similar jobs reflects the value of the job characteristics. |
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Monopsonistic Exploitation |
Paying workers less than their (MRPL) because they cannot go elsewhere for a better job offer. |
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How is the number of strikebreakers related to the elasticity of supply and demand? |
If the number of strikebreakers is smaller, then the more inelastic the labor supply + demand curve is. |
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Economic rationale for union support of minimum wage laws. |
minimum wage laws make substitutes (non-union workers) for union labor more expensive thereby increasing the demand for union labor. |
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What is a public good? Explain why free markets have problems producing public goods. How can gov't help? |
-A public good is a commodity or service that is provided without profit to all members of a society usually by the Gov't (ex. National Defense). -People free-ride public goods so they can consume them without paying. -Gov't can make us pay through taxes. |
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Explain private and social costs using a fertilizing factory. |
Private costs is the opp. cost of the resources used to producing the fertilizer. The social cost includes the private cost, but also includes the harm to the third parties (polluting a nearby stream). |
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Explain the income and substitution effects of higher wages on employment (individual labor supply). Using these effects, explain why some economists believe that a backward-bending labor supply curve for an individual exists. |
There are two effects of a wage increase. 1. Substitution effect of a higher wage means more work. 2. Income effect of higher wages means that one can maintain a decent standard of living through less work. |
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What is the Short-sightedness effect? |
Government is biased against policies with cost now, but benefits later. |
