Economics Quiz Ii

Front 1

business firms

Back 1

demand resources because they contribute to the production of goods and services

Front 2

households

Back 2

supply resources in order to earn income

Front 3

resource market

Back 3

market for inputs used to produce goods and services

Front 4

when price of a resource changes

Back 4

-increases: will lead to higher production costs, lower supply and higher prices of the goods and services produced with the resource
-the price of goods and services produced with that resource will change in the same direction

Front 5

when demand for a resource changes

Back 5

the demand and prices of the resources used to produce it will change in the same direction

Front 6

price controls

Back 6

goverment mandated prices that are generally imposed in the form of maximum or minimum legal prices
-force buyers/sellers to alter price of certain products

Front 7

price ceiling

Back 7

legally established maximum price sellers can charge for a good/resource

Front 8

price floors

Back 8

impose a minimum legal price

Front 9

shortage

Back 9

quantity demanded minus quantity supplied
condition in which the amount of a good offerend for sale by producers is less than the amount demanded by buyers at the existing price
-increase in price would eliminate shortage

Front 10

2 ways that sellers can raise prices

Back 10

1. raise their money price, holding quality constant
2. hold money price constant while reducing quality of goods
--->faced with price ceiling sellers use quality reduction

Front 11

5 results of rent controls

Back 11

1. shortages and black markets will develop
2. the future supply of rental houses will dcline
3. the quality of rental housing will deteriorate
4. nonprice methods of rationing will become more important
5. inefficient use of housing space will result

Front 12

surplus

Back 12

a condition in which amount of a good offered for sale by producers is greater than the amount that buyers will purchase at the existing price
-decline in price would eliminate surplus
-result of price floor

Front 13

minimum wage

Back 13

legislation requiring thaat workers be paid at least the stated minimum hourly rate of pay

Front 14

higher minimum wage results in

Back 14

-deterioration of nonwage qualities of minimum-wage jobs
-workers less convenient working hours
-fewer training opportunities
-less continous employment

Front 15

black market

Back 15

a market that operates outside the legal system in which either illegal goods are sold or legal goods are sold at illegal prices or terms
-prices are higher-->compensates risks suppliers are taking
-higher incidence of defective products
-higher profit rates
-more violence

Front 16

tax incidence

Back 16

the way the burden of a tax is distributed among economic units (consumers, producers, employees, employers,a nd son on)
the actual tax burden does not always fall on those who are statutorily assigned to pay the tax

Front 17

statutory incidence

Back 17

legal assignment of tax

Front 18

tax base

Back 18

the level/quantity of an economic activity that is taxed
higher tax rates reduce the level of the tax base because they make the activity less attractive

Front 19

tax revenue derived from a tax

Back 19

tax base X tax rate

Front 20

tax rate

Back 20

the per-unit amount of the tac or the percentage rate at which the economic activity is taxed

Front 21

deadweight loss

Back 21

the loss of gains from trade buyers and sellers that occurs when a tax is imposed
-deadweight loss imploses a burden on both buyers and sellers over and above the actual payment of the tax

Front 22

excess burden of taxation

Back 22

another term dor deadweight loss
reflects losses that occur when beneficial activities are forgone because they are taxed

Front 23

burden of tax depends on elasticities

Back 23

when demand is relatively more inelastic that supply, buyers bear a larger share of the burden of the tax
-when supply is relatively more inelastic that demand, sellers bear a larger share of the tax burden
-when either demand/supply is inelastic then deadweight loss will be smallers

Front 24

average tax rate

Back 24

tax liability divided by taxiable income
it is the percentage of income paid in taxes
tax liability/taxable income

Front 25

personal income tax

Back 25

in U.S. procides largest single source of government revenue

Front 26

progressive tax

Back 26

tax in which average tax rate rises with income
people with higher incomes will pay a higher percentage of their income in taxes

Front 27

proportional tax

Back 27

tax in which the average tax rate is the same at all income levels
everyone pays the same percentage of income in taxes

Front 28

regressive tax

Back 28

tax in which the average tax rate falls with income
people with higher incomes will pay a lower percentage of their income in taxes

Front 29

marginal tax rate (MTR)

Back 29

the additional tax liability a prson faces divided by his or her additional taxable income
it is the percentage of an extra dollar of income earned
change in tax liability/change in taxable income

Front 30

revenue derived from a tax

Back 30

tax base X tax rate

Front 31

laffer curve

Back 31

curve illustrating the relationship between the tax rate and tax revenues
-tax revenues will be low at bot very high and very low tax rates
when tax rates are quite high, lowering them can increase tax revenue

Front 32

subsidy

Back 32

a payment the government makes to either the buyer or seller, usually on a per-unit basis, when a good/service is purchased/sold

Front 33

elasticity and subsidy

Back 33

the greater share of the benefit of a subsidy will always be shifted toward the more inelastic side of the market
-more inelastic supply->larger share of benefit that will accrue to sellers

Front 34

economic efficiency

Back 34

1. all activities gernerating more benfit than cost are undertaken
2. no activities are undertaken for which the cost exceeds the benefit

Front 35

rules for ideal economic efficiency

Back 35

1. undertaking an economic action is efficient if it produces more benefits than costs
-failure to undertake all such actions implies tha a potential gain has been forgone
2. undertaking an economic actions is inefficient if it produces more costs than benefits
-society is worse off when counterproductive actions taken

Front 36

economic inefficiency

Back 36

failure to undertake an efficient actiion (rule 1) or undertaking of an inefficient action (rule 2)

Front 37

if it's worth doing it's worth doing imperfectly

Back 37

as more resources are dedicated to an activity the marginal improvements (benefits) will become smaller and smaller while marginal costs will ruise

Front 38

legitimate functions of government

Back 38

1. protecting individuals and their property against invasions by others
2. providing goods that cannot easily be provided through private markets

Front 39

protective function of government

Back 39

involves the maintenance of a framework of security and order-an infrastructure of rules

Front 40

productive function of government

Back 40

more efficient for government to supply good and impose taxes on citizens to cover cost
-otherwise there are high transaction costs, some products difficult to provide through market..
provide stable monetary and financial environment

Front 41

four major factors that undermine invisible hand and reduce efficiency of markets

Back 41

1. lack of competition
2. externalities
3. public goods
4. poorly informed buyers/sellers

Front 42

lack of compeition

Back 42

sellers gain from restrictomg competition
-compeition is absent->potential conflict ebtwen interests of sellers and efficient use of resources
-Antitrust laws- Sherman and Clayton ANtitrust
-Shaerman: illegal for firms to attempt to monopoloize a market

Front 43

externalities

Back 43

spillover effects of an activity that influence the well-being of nonconsenting thiurd parties
ex: neighbor with loud stereo

Front 44

external costs

Back 44

spillover effects that reduce well-being of nonconsenting third parties
-may result in economic inefficiency
ex: resources used to produce goods, valued less than production costs
-market supply curve will understate true cost of producing
-->the supply curve reflects only cost paid by firms and ignoes uncompensated costs imposed on nearby residents
-resources with property rights poorly enforced-->can be overutilized and sometimes polluted

Front 45

external benefits

Back 45

spillover effects that generate benefits for nonconsenting third parties
-problem when potential producers fail to undertake productive activities because they are unable to fully capture benefits their actions create for others
ex: vaccines-pharmaceutical companies do not benefit from nonusers so dont produce as much vaccine needed
-deman understates total benefits derived from production and use of vaccine

Front 46

public goods

Back 46

goods for which rivalry among consumers is acsent and exclution of nonpaying customers is difficult
1.nonrival in consumption
2.nonexcludable

Front 47

nonrivalry in consumption

Back 47

making good available to one consumer does not reduce its availability to others
-providing to 1 person simultaneously makes it available to other consumers
ex; radio broadcast signal

Front 48

nonexcludability

Back 48

impossible 9or at least very costly) to exclude nonpaying customers from receiving the good

Front 49

free rider

Back 49

person who receives the benefit of a good without paying for it
-because it is often virtually impossible to restrict consumption of public goods to those who pay, these goods are subject to free-rider problems

Front 50

rpeat-purchase item

Back 50

item purchased often by the same byer
-consumer can use past experience to acquire accurate info and make wise decisions

Front 51

conflicting interests, inadequate info, and unhappy customers arise when goals are

Back 51

1. difficult to evaluate on inspection and seldom repeatedly purchased from same producer
2. potentially capable of serious and lasting harmful side effects that cannot be predicted by typical consumer

Front 52

franchise

Back 52

a right/license granted to an individual to market a company's goods/services or use its brand name
-individual firms are independently owned but must meet certain conditions to continue to use the name

Front 53

underwriters laboratories incorporated (UL)

Back 53

-private-sector regulation aimed at overcoming potential info problems
-testing and certifying products for 100+ years based on own set of quality standards

Front 54

major categories of federal spending

Back 54

health care
social security
national defense

Front 55

largest ares of spending for state and local governments

Back 55

education
administration
public welfare and health

Front 56

transfer payments

Back 56

payments to individuals/institutions that are not linked to the current supply of a good/service by the recipient
-transfer of income from some individuals(who pay taxes) to others (who receive government payment)

Front 57

differences/similarities btwn governtments and markets

Back 57

1. competitve behavior is present in both the market and public sectors
2. public-sector organization can break the individual consumption payment link
3. scarcity imposes the aggregate consumption-payment link in both sections
--->costly to provide goods and services thru government even if good provided is "free of charge" to certain consumers
4. private-sector action is based on mutual agreement; public-sector action is based on majority rule
5. when collective decisions are made legislatively, voters must choose among candidates who represent a bundle of positions on issues
6. income and influence are distributed differently in the two sectors

Front 58

individual consumption payment link

Back 58

goods alloted to people by what ppl are willing to pay

Front 59

private-sector action based on mutual agreement

Back 59

in market two parties engage in trade but their actions are voluntary and motivated by expectation of mutual gain

Front 60

public-sector action is based on majority rule

Back 60

in democratic setting collective action based on majority rule
-through direct voting or legislative processs involving elected representatives

Front 61

public-choice analysis

Back 61

study of decision making as it affects the formation and operation of collective organizationss like governments
-in general, principles and methodology of economics are applied to political science topics
-links theory of individual behavior to political action, analyzes implications of theory and tests them against events in real world

Front 62

collective decision-making process

Back 62

complex interaction among voters, legislators and bureaucrats
-voters elect legislature->levies taxes->allocates budgets and regulate authority to various government agencies and bureaus->nureaucrats in charge of agencies utilize funds to supply government services and income transfers->exercise regulatory authoruty

Front 63

three priumary political players

Back 63

voters, legislators, and bureucrats

Front 64

incentives for voters

Back 64

-self-interest
-greater perceived net economic cost means voter will be less inclined to support candidate
-also pick candidate who supports most government services and transfer benedits to them and their favorite causes

Front 65

rational ignorance effect

Back 65

highly unlikely that an idividual vote will decide the outcome of an election a rational individual has little/no incentive to search for and acquire the info needed to cast an informed vote

Front 66

motivation for political candidates

Back 66

pursuit of coters
competition from other candidates
want advantage

Front 67

gerry mandering

Back 67

politicians manipulate redrawing of geographic political districts to increase chances or reelection

Front 68

incumbets

Back 68

use government resources for reelection campaigns
-campaign finance reforms to make it difficult for challenge to raise funds

Front 69

incentives for bureucracy

Back 69

bureucrats have narrowly focused interests
-want to see own agency's goals furthered
-requires larger budgets/greater authority to regulate
-beyond economically efficient

Front 70

when voters pay in proportion to benefits receives

Back 70

all voters will gain if govt action is productive and all will lose if it is unproductive

Front 71

user charges

Back 71

payments users 9consumers) are required to make if they want to receive certain services provided by the government
ex: local services (electricity, water, grabage pickup, etc)

Front 72

type 1

Back 72

everyone benefits and everyone pays
widespread benefit and widespread cost
-may not be precisely proportional to the benefits individuals receive but there will be a rough relationship
-when it is productive almost everyone gains more than they pay-little opposition

Front 73

type 3

Back 73

concentrated benefits and concentrated costs
successful political process because benefits and costs concentrated on one or more small subgroups

Front 74

special-interest issue

Back 74

an issure that generates substantial individual benefits to a small minority while imposing a small individual cost on many other citizens
-in total, the net cost to the majority might either exceed or fall short of the net benefits of the special-interest group

Front 75

logrolling

Back 75

the exchange between politicians of political support on one issue for political support on another

Front 76

pork-barrel legislation

Back 76

package of spending projects benefiting local areas financed through the federal government
-the costs of the projects typically exceed the benefits in total, but the projects are intensly desired by the residents, of a particular district who get the benefits without having to pay much of the costs

Front 77

earmarking

Back 77

direction of budgeted funds to specific projects, programs and locations
-technique is costly but provides major benefits to business firms and other concentrated constitutent groups and to the districts where the spending takes place
-benefits are often targeted to those willing to make substantial campaign contributions

Front 78

sweet subsidies to sugar growers

Back 78

government denies import of sugar-->domestic sugar only bought by U.S. consumers-> higher prices->only small group of sugar executives benefits although widespread high cost

Front 79

type 4

Back 79

benefits of government action spread far and wide, and costs highly concentrated
-special-interest groups will oppose because likely to share cost
politicans will favor special-interest groups because thye will be more informed

-in case of special-interet issues, there is a conflict between good politics and getting elected and the efficient use of resources

Front 80

short-sightedness effect

Back 80

voters have weak incentive to acquire info, therefore current economic conditions have major impact on their choices at election time
-so politicans will oppose legislation that involves immediate and easily identifiable costs because it is too hard for voters to identify future benefits

Front 81

short-sightedness effect

Back 81

the misallocation of resources that results because public-sector action is biases in:
1. favor of proposals yielding clearly defined current benefits in exchange for difficult to identify future costs
2. against proposals with clearly identifiable, current costs that yield less concrete and less obvious future benefits

Front 82

rent seeking

Back 82

actions by individuals and groups designed to restructure public policy in a manner that will either directly or indirectly redistricute more, income to themselves or the projects they promote
-favor seeking

Front 83

2 ways individuals acquire wealth

Back 83

production and plunder

Front 84

means-tested transfers

Back 84

those directed toward poor
1/6 of all transfers

Front 85

3 major reasons why government transfer activity will reduce size of economic pie

Back 85

1. income redistribution weakens link btwn productive actibity and reward
-->when taxes take large share of person's income-->reward from hard work is reduced
2. as public policy redistributes a larger share of income, more resources will flow into wasteful rent-seeking activities
3. higher taxes to finance income redistribution and an expansion in rent seeking will induce taxpayers to focus les son income-producing activities and more on actions to protect their income

Front 86

bankruptcy

Back 86

costs of resource inputs exceed benefits as measured by customer payments
-applied to private not public

Front 87

4 factors that weaken case for market-sector allocation

Back 87

1. lack of competition
2. externalities
3. public goods
4. poor information

Front 88

4 facotrs that weaken case for public-sector intervention

Back 88

1. special-interest effect
2. shortsightedness effect
3. rent seeking
4. weak incentives for operational efficiency