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Economics

The study of how people use their resources to satisfy their unlimited wants
Resources
The inputs, or factors of production, used to produce the goods and services that people want; resources consist of labor, capital, and entrepreneur ability
Labor
The physical and mental effort used to produce goods and services
Capital
The buildings, equipment, and human skills used to produce goods and services
Natural Resources
All gifts of nature used to produce goods and services; includes renewable and exhaustible resources
Entrepreneur Ability
The imagination required to develop a new product or process, the skill needed to organize production production, and the willingness to take the risk of profit or loss
Entrepreneur
A profit seeking decision maker who starts with an idea, organizes an enterprise to bring that idea to life and assumes the risk of the operation
Wages
Payment to resource owners for their labor
Interest
Payment to resource owners for the use of their capital
Rent
Payment to resource owners for their use of their natural resources
Profit
Reward for entrepreneur ability; sales revenue minus resource cost
Good
A tangible product used to satisfy human wants
Service
An activity, or intangible product, used to satisfy human wants
Scarcity
Occurs when the amount people desire exceeds the amount available at zero price
Market
A set of arrangements by which buyers and sellers carry out exchange at mutually agreeable terms
Product Market
A market in which a good or service is bought or sold
Resource Market
A market in which a resource is bought and sold
Circular-flow model
A diagram that traces the flow of resources, products, income, and revenue among economic decision makers
Rational self interest
Each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit
Marginal
Incremental, additional, or extra; used to describe a change in economic variable
Microeconomics
The study of the economic behavior in particular markets, such as that for computers or unskilled labor
Macroeconomics
The study of the economic behavior of entire economics, as measured, for example, by total production and employment
Economic fluctuations
The rise and fall of economic activity relative to the long-term growth trend of the economy; also called business cycles
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Scarcity
Occurs because wants are unlimited but resources are limited. When the amount of people desire exceeds the amount available at zero price
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Positive
An assertion about economic reality supported or rejected by the facts. Concerns "what is"
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Normative
Reflects an opinion and it's concerns, in someone's opinion "should be"
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Circular flow model
Describes the flow and interaction between, resources, products, income and revenue among economic decision makers
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Categories of resources
Natural resources, labor, capital, entrepreneur ability
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Marginal
Incremental, additional or extra; used to describe a change in an economic variable
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Opportunity Cost
The value of the best alternative forgone when an item or activity is chosen
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Economic Theory or Economic Model
A simplification of reality used to make predictions about cause and effect in the real world
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Variable
A measure, such as price or quantity, that can take on different values at different times
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Behavioral assumption
The assumption that describes the expected behavior of economic decision makers-what motivates them
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Hypothesis
A theory about how key variables relate
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Positive economic statement

A statement that can be proved or disproved by reference to facts
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Normative economic statement

A statement that reflects an opinion, which cannot be proved or disproved by reference to the facts
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Association-is-causation fallacy
The incorrect idea that if two variables are associated in time, one must necessarily cause the other
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Fallacy of composition
The incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole
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Secondary effects
Unintended consequences of economic actions that may develop slowly over time as people react to events
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Market Structure
Important features of a market, such as the number of firms, product uniformity across firm's, firm's ease of entry and exit, and forms of competition.
Perfect competition
A market structure with many well informed buyers and sellers of a standardized product and no obstacles to entry and exit of firms in the long run
Commodity
A standardized product ;a product that does not differ across producers, such as a bushel of wheat or an ounce of gold.
Price taker
A firm that faces a given market price whose quantity supplied has no effect on that price ;a perfectly competitive firm that decides to produce must accept, or "take" the market price.
Marginal Revenue (MR)
A firms change in total revenue from selling an additional unit ;a perfectly competitive firm's marginal Revenue is also the market price.
Golden Rule of profit maximization
To maximize profit or minimize loss, a firm should produce the quantity at which marginal Revenue equals marginal cost ;this rule holds for all market structures
Average revenue (AR)
Total revenue divided by quantity, or AR=TR/q;in all market structures, average revenue equals market price
Short – run firm supply curve
A curve that shows how much a firm supplies at each price in the short run ;in the perfect competition, that portion of a firm's matthias cost curve that intersects and rises above the low point on its average variable cost curve.
Short – run industry supply curve
A curve that indicates the quantity supplied by the industry at each price in the short run ;in perfect competition, the horizontal sum of each firm's short – run supply curve
Long – run industry supply curve
A curve that shows the relationship between price and quantity supplied by the industry once firm's adjust in the long run to any change in market demand
Constant – cost industry
An industry that can expand our contract without affecting the long – run per – unit cost of production ;the long – run industry supply curve is horizontal
Increasing – cost industry
An industry that faces higher per – unit production costs as industry output expands in the long – run ;the long – run industry supply curve slopes upward
Product efficiency
The condition that exists when production uses the least – cost combination of inputs ;minimum average cost in the long run
Allocative efficiency
The condition that exists when firm's produce the output most preferred by consumers ;marginal benefit equals marginal cost
Producer surplus
A bonus for producers in the short run ;the amount by which total revenue from production exceeds variable costs.
Social welfare
The overall well – being of people in the economy ;maximized when the marginal cost of production equals the marginal benefit to consumers.
Barrier to entry
Any impediment that prevents new forms from entering an industry and competing on an equal basis with existing firm's
Patent
A legal barrier that games the holder the exclusive right to sell a product for years from the date the patent application is filed.
Innovation
The process of turning an invention into a marketable product
Price maker
A firm with some power to set the price because the demand curve for its output slips downward ;a firm with market power.
Deadweight loss of monopoly
Net loss to society when a firm with market power restricts output and increases the price.
Rent seeking
Activities undertaken by individuals or firm's to influence public policy in a way that increases their income
Price discrimination
Increasing profit by charging different groups of customers different prices for the same product.
Perfectly discriminating Monopolist
A Monopolist who changes a different price for each unit sold ;also called the Monopolists dream
Monopolistic Competition
A market structure with many firms selling products that are substitutes but different enough that each firm's demand curve slopes downward ;firm entry is relatively easy
Excess Opacity
The difference between a firm's profit maximizing quantity and the quantity that minimizes average cost by increasing quantity
Oligopoly
A market structure by so few firm's that each behaves interdependently
Undifferentiated oligopoly
An oligopoly that sells products that does not differ across suppliers, such as an ingot of steel or a barrel of oil
Differentiated oligopoly
An oligopoly that sells products products differ across suppliers, such as automobiles or breakfast cereal
Collusion
An agreement among firm's to increase economic profit by dividing the market and fixing the price
Cartel
A group of firms that agree to coordinate their production and pricing decisions to reap monopoly profit
Price Leader
A firm whose price is matched by other firms in the market as a form of tacit collusion
Game Theory
An approach that analysis olgapolitic behavior as a series of strategic moves and Counter moves by rival firms
Prisoner's Dilemma
A game that shows why players have difficulty cooperating even though they would benefit from cooperation
Strategy
In game theory, the operational plan pursued by a player
Playoff matrix
In game theory, a table listing the payoffs that each player can expect from each move based on the actions of the other player
Dominant–strategy equilibrium
In game theory, the outcome achieved when each player and choice does not depend on what the other player does
Duopoly
A market with only two suppliers ;a special type of oligopoly market structure
Nash equilibrium
A situation in which a firm, or a player in game theory, chooses the best strategy given the strategies chosen by others;no participant can improve his or her outcome by changing strategies even after learning of strategies selected by other participants
Tit–for–tat
In game theory, a strategy in repeated games when a player in one round of the game mimics the other player's behavior in the previous round;an optimal strategy for getting the other players to cooperate
Coordination game
A type of game in which a Nash Equilibrium occurs when each player chooses the same strategy;neither player can do better than matching the other player's strategy
Characteristics of Perfect Competition
Many informed buyers and sellers of a standardized product and no obstacles to entry or exit in the long run
1)many buyers and sellers
2)firm's all a commodity
3)buyers and sellers are fully informed about price and availability of all resources and products
4)firm's and resources are freely mobile
The demand curve by perfect competition
At market equilibrium, the perfect competition is when an intersection occurs between the market demand curve and the market supply curve. A firm's demand from an individual farmers perceptive is a straight horizontal line at the market price
What is Profit maximization rule
A firm should produce the quantity of which marginal Revenue is equal to marginal cost
The relationship between marginal Revenue and average revenue in perfect competition
Perfectly competitive firm can sell any quantity for the same price per unit, marginal Revenue is also average revenue
Characteristics of Perfect monopoly
1)single seller
2)barriers to entry
3)price makers
Barrier to entry?
Prevents new firm's from participating in completion on an equal basis with other firms. Legal restrictions – not everyone can join the market. Controls essential resources. Economies of scale
Demand curve for a Monopolist
Demand curve slopes downward, reflecting the law of demand. Mr curve drops faster and is under the demand curve
Monopoly and economic profit in long run
If a monopoly is insulated from competition by high barriers that block new entry. Economic profit can persist in the long run
Characteristics of monopolistic Competition
Many producers
Offer products that are substitutes (not identical to consumers)
Demand curve slopes downward
Supplier has more power over changed power
Buyers can't influence price
Firm's are price makers because barrier to entry is low
Sellers are competitive
Monopolistic Competition and profits
A firm making profits in the short run will break even (normal profit) in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistic competitive firm will make zero economic profit
Characteristics of oligopoly
A market structure characterized by so few firm's that each behaves interdependently. Undifferentiated and differentiated oligopoly
What is cartel?
An association of manufacturers or suppliers with the purpose of maintaining process at a high level and restricting competition.
D) economic profit is zero
If average revenue equals average total cost
A) total revenue is maximized
B) average revenue is maximized
C) economic profit is maximized
D) economic profit is zero
B) marginal Revenue
Average revenue for a perfectly competitive firm is equal to
A) price times output
B) marginal Revenue
C) total revenue /marginal Revenue
D) output /total revenue
E) zero
A) $0
In the short run, if a firm shuts down, it's total revenue is
A) $0
B)equal to its fixed costs
C) greater than its variable costs
D) greater than its fixed costs
E) less than its variable costs
E) a single seller of a product with no close substitutes
A Monopolist is
A) one of a large number of small firms that produces a homogeneous good
B) one of a small number of firms that produces a differentiated good
C) a single seller with many close substitutes
D) one of a small number of large firm's that produces a homogeneous good
E) a single seller of a product with no close substitutes

E) long – run average cost declines as a firm expands output
Natural monopolies form when
A) small firms merge to form larger firm's
B) one firm has control over the entire supply of a basic input required to produce the product
C) one firm's monopoly position is created and enforced by the government
D) one firm recieves patent protection for certain basic production processes
E) long – run average cost and declines as a firm expands output
B) p>MR because the Monopolist must decrease price on all units sold in order to sell an additional unit
Which of the following is true of marginal Revenue for Monopolist that charges a single price?
A) p=MR because there are no close substitutes for the Monopolists product
B) p>MR because the Monopolist must decrease price on all units sold in order to sell an additional unit
C) pD) AR=MR because there are no close substitutes for the Monopolists product
E) p=MR only at the profit – maximizing quantity
D) Marginal revenue equals marginal cost
A profit – maximizing monopolist produces an output level at which
A) Marginal revenue is the greatest distance from marginal cost
B) price is less than marginal cost
C) the value to society of the last unit produced equals marginal cost
D) marginal revenue equals marginal cost
E) consumers wish to purchase less than what is produced because of high monopoly prices.
B) charging different buyers different prices for the same product
A monopolist price discriminates by
A) charging different buyers different prices for different products
B) charging different buyers different prices for the same product
C) selling at a price below average total cost
D) selling at a price below marginal cost
E) selling at a price above marginal revenue
B) the marginal benefit, that consumes attach to the final unit purchased, just equals the opportunity cost of the resources employed to produce that unit.
Allocative efficiency occurs when
A) output is produced at minimum average cost
B) the marginal benefit , that consumes attach to the final unit purchased , just equals the opportunity cost of the resources employed to produce that unit
C) new firms enter a perfectly competitive market
D) the marginal benefit consumes attach to products purchased is maximized.
E) goods and services are sold in an English style auction market.
A) cannot profitable enter the industry, even in the long run
In the monopoly market structure, new firms
A) cannot profitably enter the industry, even in the long run
B) may freely enter and leave the industry in the short run and the long run
C) may freely enter and leave the industry in the long run only
D) may freely enter and leave the industry in the short run only
E) have no incentive to enter the industry, even if economic profits are present
C) Marginal revenue is negative where demand is inelastic
What is the relationship between price elasticity of demand and the monopolists revenue?
A) marginal revenue is maximized where demand is unit elastic
B) average revenue is maximized where demand is unit elastic
C) marginal revenue is negative where demand is Inelastic
D) average revenue is beget ice where demand is Inelastic
E) marginal revenue is lowest where demand is unit elastic
What is a barrier of entry and where does it occur?
Any impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms. In monopolies, this occurs the most.
Deadweight loss
A loss that both a Monopoly and Monopolistic competition experience. It is when a firm with market power restricts output and increases the price meaning less for the consumer.
Why might a firm operate with zero economic profit?
A firm will stay in business as long as they cover their variable costs. Because the firm is still loosing money from fixed cost, it may be a possibility for them to makeup that loss in the future. If their profits does not cover variable as well as fixed, the business shuts down because there is no benefit and too much risk.
E) total variable cost is greater than total revenue at all output levels
In the short run, a monopolist will always shut down when
A) total cost is greater than total revenue at all output levels
B) total variable cost is greater than fixed cost
C) total revenue is greater than variable cost at all output levels
D) fixed cost is greater than total revenue at all output levels
E) total variable cost is greater total revenue at all output levels
A) State license
Adam Matsumi is an attorney who charge legal fees above the competitive level because entry of new competitors is made more difficult by the need to hold a(n)
A) state license
B) patent
C) essential resource
D) economy of scale
E) copyright
C) many firms, each selling a slightly different product
Monopolistic competitive industries consist of
A) one firm selling several products
B) one firm selling one product
C) many firms, each selling a slightly different product
D) many firms, each selling a completely different product
E) emphasizing that the product provided the same benefits to consumers as the others on the market even when it is really physically different
A firm could differentiate its product by all of the following except one. Which is the exception?
A) making the product a available at a number of different locations
B) increasing the number of services that accompany the product
C) making the product physically different from other products
D) using packaging or advertising to create a special subjective image of the product in the consumer's mind
E) emphasizing that the product provides the same benefits to consumers as the others on the market, even when it really is physically different
A) few firms , which have control over market price
An oligopoly is characterized by
A) few firms, which have control over market price
B) many firms and some barriers of entry
C) a large number of firms and no barriers of entry
D) a single firm and no barriers of entry
E) a single firm and significant barriers to entry
C) oligopolies
Interdependent decision making on price, quantity, or advertising is characteristics of
A) perfect competition
B) monopolies
C) oligopolies
D) monopolistic competition
E) both oligopolies and monopolistic competition
B) perfectly elastic
The demand curve facing a perfectly competitive firm is
A) almost vertical at the market quantity
B) perfectly Inelastic
C) perfectly elastic
D) horizontal at the price the firm wishes to change
E) downward sloping
B) maximize economic profit
Economists assume that firms seek to
A) maximize accounting profit
B) maximize economic profit
C) maximize total revenue
D) maximize normal profit
E) minimize cost
C) the change in total revenue divided by the change in output

Marginal Revenue is
A) total revenue minus total cost
B) total revenue divided by quantity of output
C) the change in total revenue divided by the change in output
D) the change in total revenue divided by the change in the quantity of an input used
E) economic profit
Derived Demand
Demand that arises from the demand for the product the resource produces
Economic Rent
Portion of a resource's total earnings that exceeds, its opportunity cost; earnings greater than the amount required to keep the resources in its present use
Marginal Revenue Product
The change in total revenue when an additional unit of a resource is employed, other things constant
Marginal resource cost
The change in total cost when an additional unit of a resource is hired, other things constant
Resource substitutes
Resources that substitute in production; an increase in the price of one resource increases the demand for the other
Resource compliments
Resources that enhance one another's productivity; a decrease in the price of one resource, increases the demand for the other
Market Work
Time sold as labor
Nonmarket work
Time spent getting an education or a do–it–yourself production for consumption (personal)
Leisure
Time spent on nonwork activities
Susbstitution effect of a wage increase
A higher wage encourages more work because other activities now have a higher opportunity cost
Income effect of a wage increase
A higher wage raises a worker's income, increasing the demand for all normal goods, including leisure, so the quantity of labor supplied to market work decreases
Backward–bending supply curve of labor
As the wage increases, the quantity of labor supplied may eventually decline; the income effect of a higher wage increases the demand for leisure, which reduces the quantity of labor supplied enough to more than offset the substitution effect of a higher wage.
Labor Union
A group of workers who organize to improve their terms of employment
Craft Union
A union whose members have a particular skill or work at a particular craft, such as plumbers or carpenters
Industrial Union
A union consisting of both skilled and unskilled workers form a particular industry, such as all autoworkers or all steelworkers.
Collective bargaining
The process by which union and management negotiate a labor agreement
Mediator
An impartial observer who helps resolve differences between union and management.
Binding Arbitration
Negotiation in which union and management must set an impartial observer's resolution of a dispute
Strike
A union's attempt to withhold labor from a firm to halt production
feather bedding
Union effects to force employers to hire more workers than demanded at a particular wage
Right–to–work states
states where workers in unionized companies do not have to join the union or pay union dues
Positive rate of time preferece
Consumers value present consumption more than future consumption.
Interest rate
Interest per year as a percentage of the amount saved or borrowed
Expected rate of return on capital
The expected annual earnings divided by capital's purchase price
Intellectual property
An intangible asset created by human knowledge and ideas
Demand for loanable funds
the negative relationship between the market interest rate and the quantity of loanable funds demanded, other things constant
supply of loanable funds
The positive relationship between the market interest rate and the quantity of loanable funds supplied, other things constant
Loanable funds market
The market in which saver (suppliers of loanable funds) and borrowers (demanders of loanable funds) come together to determine the market interest rate and the quantity of loan funds exhanged
Prime rate
The interest rate lenders charge their most trustworthy buisness borrowers
Collateral
An asset pledged by the borrower than can be sold to pay off the loan in the event the borrower defaults
Term structure of interest rates
The relationship between the duration of a loan and the interest rate charged, typically interest rates increase with the duration of the loan, because longer loans are considered more risky
Present Value
The value today of income to the received in the future
Discounting
Converting future dollar amounts into present value
Annuity
A given sum of money received each year for a specified number of years
Initial public offering
The initial sale of corporate stock to the public
Corporate stock
Certificate reflecting part ownership of a corporation
Dividents
After–tax corporate profit paid to stockholder rather than retained by the firm and reinvested.
Retained earnings
After–tax corporate profit reinvested in the firm rather than paid to stockholders as dividends
Bond
Certificate reflecting a firm's promise to pay the lender periodic interest and to repay the borrowed sum of money on the designated maturity date.
Vertical Integration
The expansion of a firm into stages of production earlier or later than those in which it specializes, such as its steel maker that also mines iron ore.
Outsourcing
A firm buys inputs from outside suppliers
Core competency
Area of speciality: the product or phase of production a firm supplies with greatest efficiency
Bounded rationality
The notion that there is a limit to the information that a firm's manager can comprehend and act on
Economics of scope
Average costs decline as a firm makes a range of different products rather than specialixing in just one product
Winner's curse
The plight of the winning bidder who overestimates an asset's true value
Asymmetric information
one side of the market has better information about the product than does the other side
Hidden characteristics
One side of the market knows more than the other side about product characteristics that are important to the other side
Adverse selection
Those on the informed side of the market self–select in a way that harms those on the uninformed side of the marked
Hidden Actions
One side of an economic relationship can do something that the other side cannot observe
Principle–agent problem
The agent's objectives differ form those of the principle, and one side can pursue hidden actions.
Principle
A person or firm who hires an agent to act on behalf of that person or firm
Agent
A person or firm who is supposed to act on behalf of the principle
Maral Hazard
A situation in which one party, as a result of a contract, has an incentive to shirk its responsibilities in a way that harms the other party to the contract.
Effeciency Wage Theory
The idea that offering high wages attracts a more talented labor pool and encourages those hired to perform well to keep their jobs
Signaling
Using a proxy measure to communicate information about unobservable characteristics; the signal is more effective if more productive workers find it easier to send than do less productive workers
Screening
Using a proxy measure to communicate information about unobservable characteristics; the signal is more effective if more productive workers find it easier to send than do less productive workers
Behavioral Economics
An approach that borrows insights from psychology to help explain economic choices
Neuroeconomics
Mapping brain activity while subjects make economic choices; the goal is to develop better models of economic decision making
Market Power
The ability of a firm to raise its price without losing all its customers to rival firms
Social Regulation
Government regulation of natural monopoly, where, because of economies of scale, average production cost is lowest when a single firm supplies the market.
Anti–trust policy
Government regulation aimed at preventing monopoly and fostering competition in market where competition is desirable
Public utilities
Government–owned or government–regulated monopolies
Capture theory of regulation
Producer's political power and strong stake in the regulatory outcome lead them, in effect, to "capture" the regulating agency and prevail on it to serve producer interests.
Trust
Any firm or group of firms that tries to monopolize a market
Sherman Antitrust Act of 1890
First national legislation in the world against monopoly; prohibited trusts, restraint of trade, and monoplization, but the law was vague and , by itself, ineffective
Clayton Act of 1914
Beefed up the Sherman Act; outlaw certain anticompetitive practices not prohibited by the Sherman Act, including price discrimination, tying contracts, exclusive dealing, interlocking directorates, and buying the corporate stock of a competitior
Tying contract
A seller of one good requires a buyer to purchase other goods as part of a deal
Exclusive dealing
A supplier prohibits its customers from buying from other suppliers of the product.
Interlocking direcorate
A person serves on the boards of directors of two or more competing firms.
Federal Trade Commission (FTC) Act of 1914
Established a federal body to help enforce antitrust laws; run by commissioners assisted by economists and lawyers
Horizontal Merger
A merger in which one firm continues with another that produces the same type of product
Vertical Merger
A merger in which one firm combines with another from which it had purchased inputs or to which it had sold output
Consent decree
The accused party, without admitting guilt, agree not to do whatever it was charged with if the government drops the charges
Per se illegal
In antitrust law, buisness practices deemed illegal regardless of their economic rationale of their consequences.
Rule of reason
before ruling on the legality of certain buisness practices, a court examines why they were undertaken and what effect they have on competition.
Predatory Pricing
Pricing tactics employed by a dominant firm to drive competitors out of buisness, such as temporarily selling below marginal cost or dropping below the price only in certain markets
Herfindahl–Hirschman Index (HHI)
A measure of market concentration that squares each firm's percentage share of the market, then sums these squares
Conglomerate merger
A merger of firms in different industries
Open–access good
A good such as ocean fish that is rival in consumption but from which nonpayers cannot be excluded easily
Free–rider problem
Because nobody can be easily excluded from consuming a public good, some people may try to reap the benefits of the good without paying for it
Median–voter model
Under certain conditions, the preferences of the median, or middle, voter will dominate the preferences of all other voters
rational ignorance
A stance adopted by voters when they realize that the cost of understanding and voting on a particular issue exceeds the benefit expected from doing so.
Traditional public–goods legislation
Legislation that involves widespread costs and widespread benefits– nearly everyone pays and nearly everyone benefits.
Special–interest legislation
Legislation with consentrated benefits but widespread costs
Pork–barrel spending
Special–interest legislation that has narrow geographical benefits but is funded by all taxpayers
Populist legislation
Legislation with widespread benefits but concentrated costs
Competing– interest legislation
Legislation that confers concentrated benefits on one group by imposing concentrated costs on another group
Underground economy
An expression used to describe market activity that goes unreported either because it is illegal or because those involved want to evade taxes.
Bureaus
Government agencies charged with implementing legislation and financed by appropriations from legislative bodies.
Lorenz curve
A curve showing the percentage of total income received by a given percentage of recipients whose incomes are arrayed form smallest to largest
Median income
The middle income when all incomes are ranked form smallest to largest
Median wage
The middle wage when wages of all workers are ranked form lowest to highest
U.S official poverty level
Benchmark of input computed by the federal government to track poverty over time; initially based on three times the cost of a nutritionally adequate diet.
Social Insurance
Government programs designed to help make up for lost income of people who worked but are now retired, unemployed, or unable to work because of disability or work–injury
Social Security
Supplements retirement income to those with a record of contributing to the program during their working years; by far the largest government redistribution program
Medicare
Social insurance program providing health insurance for short–term medical care to older Americans, regardless of income
Income Assistance Programs
Welfare programs that provide money and in–kind assistance to the poor; benefits do not depend on prior contributions
Means–tested program
A program in which, to be eligible, an individual's income and assets must not exceed specified levels.
Temporary Assistance for Needy Families (TANT)
An income assistance program funded largely by the federal government but run by the states to provide cash transfer payments to poor families with dependent children
Supplemental Security Income (SSI)
An income assistance program that provides cash transfers to the elderly, poor and the disabled; a uniform federal payment is supplemented by transfers that vary across states
Earned–income tax credit
A federal program that supplements the wages of the working poor
Medicaid
As in–kind transfer program that provides medical care by poor people; by far the most costly welfare prgram
SNAP
As in–kind transfer program that differs low–income households vouchers redeemable for food; benefit level vary inversely with household income
Autarky
National self–sufficiency; no economic interaction with foreigners
Terms of trade
How much of one good exchanges for a unit of another good
World price
The price at which a good is traded on the world market; determined by the world demand and world supply for the good.
General Agreement on Tariffs and Trade (GATT)
An international tariff– reduction treaty adopted in 1947 that resulted in a series of negotiated "rounds" armed at freer trade; the Uruguay Round created GATT's successor, the World Trade Organization (WTO)
dumping
Selling a product abroad for less than charged in the home market or for less than the cost of production
Uruguay Round
The final multilateral trade negotiation under GATT; this 1994 agreement cut tariffs, formed the World Trade Organization (WTO), and will eventually eliminate quotas
World Trade Organization (WTO)
The legal and institutional foundation of the multilateral trading system that succeeded GATT in 1995
What is derived demand?
Derived demand is the demand that arises from the demand for the product the resource produces. For example, the demand for coal leads to a derived demand for mining. Demand should show some potential to grow. Not a commodity.
What is economic rent?
A part of a resources total earnings that exceed the opportunity cost; earnings greater than the amount required to keep the resources in its present use.
Everyone is capable of singing. But someones economic rent are better because someone is better at it. Its not duplicatable. Combination of skills
What is marginal revenue product?
Its the change in total revenue when an extra unit of a resource is added, all other things constant. How much extra do we get when we add one more unit of something? How much more sales will I get? Should I add an additional unit?
What is marginal resource cost?
The change in total cost when an additional unit of a resource is hired, other things constant. What does another unit of labor cost the firm? Total cost when an additional unit is hired. MRP=MRC (input) (resources) = MR= MC (output) (goods and services)
What are the three uses of time?
A Market Work–time sold as labor
B Nonmarket work– time spent getting an education or production for personal use
C Leisure– time spent on non–work activities
Why do people work
1) Income buys goods and services
2) Can produce goods and services directly like making a sandwich
3) People invest time in education with an expectation into future earnings and higher consumption
What could cause a labor supply to bend backward?
If the income effect of a higher wage eventually dominate the substitution effect, reducing the quantity of labor supplied as the wage increases. Want to enjoy some of the money they have earned.
What other than wages affects labor supply?
Other sources of income nonmonetary factors, value of job experience, taste for work (physical labor over office work)
How do firms determine the optimal level of investment?
Firms buy new capital goods only if they expect this investment to yield a higher return than other possible uses of their funds
What is present value?
The current value of income to be received in the future. Spending money now because it might not be as much in the future. Investing today and getting money in the future. Future= less valuable. How much money must I put it in today to get the same exact in the future.
Why do multiple interest rates exist?
Different rates have different risks, different duration of the loans, different administration costs, and different tax treatments. Credit Cards are more risky than a car. The larger the loan, the more risky. Tax treatments– tax free
Who are entrepreneurs?
Entrepreneurs comes up with an idea, turns that idea into a marketable product, accepts the risk of success and failure, and claims any resulting profit or loss. They drive the economy forward by inventing new products, improving existing products and invent new production methods
Why do firms exist?
Firms minimize the transaction costs and the production costs of economic activity
What is vertical integration?
The expansion of a firm into stages of production earlier or later than those in which it specializes, such as the steel maker that also mines iron ore. Iron ore–Raw Steel–Refined–Wholesaler (Vertical)
Horizontal– Buying all the same thing
What is meant by the optimal amount of information?
Market prrticipants continue to gather information as long as the marginal benefit exceeds marginal cost. Too much information wastes resources and not enough information does not give you enough information on price. Narrow down search and search some more and requires time and energy. Each piece of information costs more and more. Point of rational ignorance
What is asymmetric information?
One side of the market has better information about the product than does the other side.
What is principal–agent problem?
The agent's objectives differ from those of the principle, and one side can pursue hidden actions. If you work for someone else, you are their agent. Agent is hired to follow objectives of the Principle. Occurs throughout all of buisness. Your interest conflicts with the owners.
How are Regulation and Antitrust different?
Regulation aims to control price, output, the entry of firms, and the quantity of service industries where monopolies are inevitable or desirable, while antitrusts is aimed to prevent monopoly in markets where competition is desirable
Why can't natural monopolists be forced to sell where Price=margnginal cost?
Marginal Revenue would be less than the cost representing the cost. Utilities like Georgia Power. Only have a single provider. Get the company evaluate the total value of all the assets and establish an appropriate profit level. What are the assets worth? Encourage them to provide more assets. No one agrees on appropriate price. Rate Structures are complex things
What is the capture theory of Regulation?
Producers political power and strong stake in the regulatory outcome lead them, in effect, to "capture" the regulating agency and prevail on it to serve producer interests. Public Service Commission and Georgia Power.
What is the Sherman Antitrust Act?
Formed in 1980, first national legislation against monopoly. Prohibited trusts, restaint of trade, and monopolization but the law was vague and , by itself, ineffective
Compare Per Se Illegal and Rule of Reason?
In per se illegal, a buisness practice is deemed illegal regardless of their economic rationale or the consequences of the action, while in rule of reason, the court examines why the action was take and what kind of impact it will have on competition
How are rival and exclusive different?
Rival means the amount consumed by one person is unavailable for others to consume. Exclusive means suppliers can exclude goods from those who dont pay.
What is the median voter model?
Under certain conditions, the preferences of the median or middle voter will dominate the preferences of all other votes.
How are special interest and competing interest policies different?
Special interest legislation is legislation with concentrated benefits but widespread costs and competing interest legislation is legislation that confers concentrated beliefs on one group by imposing concentrated costs on another group. Special interest ex: price supports for dairy products have benefited a small group but to benefit dairy farmers, the program spread costs to all tax payers.
Competing interest ex: labor unions vs employers.
What is rent seeking?
When an organization or individual uses their resources to obtain economic gain from others without reciprocating any benefits back to society through wealth creation
What is a Lorenz Curve?
A curve showing the percentage of total income received by a given percentage of recipients whose incomes are arrayed from smallest to largest.
Why do incomes differ?
Differences in education, ability, and job experience. The number of household members who are working differs.
What are the most important programs to help the poor in the U.S?
One way government can try to reduce poverty is to promote a healthy economy, one with lots of jobs. The stronger the economy, the greater the job opportunites, and the more likely people find work.
Who are the poor?
The poor consists of people who are either under 18 years of age or above 65 years of age.
How has welfare been reformed?
Work requirements and time limits have resulted in substantial declines in the welfare caseload. In 1996, Aid to Families with Dependent Children was changed to Temporary Assistance for Needy Families.
What is the Law of Comparative Advantage?
It states that each country should specialize in producing the goods with the lower opportunity cost.
Why does specialization work in international trade?
Specialization works for international trade because of the differences in resource endowments, economies of scale, and differences in taste and promotes more variety. Countries export products they can produce more cheaply in return for products that are unavailable domestically or are cheaper elsewhere. Hawaii and coffee
What are the types of trade international restrictions?
Consumer surplus and producer surplus from market exchange, Tariffs, Import quotas, Export subsidies, Low–interest loans. Early England restricting trade. Making them farm everything. Tea Party
What are the arguments for trade restrictions?
National defense argument, infant industry argument, antidumping argument, jobs and income argument, declining industries argument. National defense argument– Maintain industries in case of war. Infant– new industries cannot compete with others. Antidumping– other country lower prices and raises prices after. Impossible to teach others new jobs. Decline industries means not enough demand.
Who are our biggest trading partners?

Canada, Mexico, China, Japan, the United Kingdom, Germany, Brazil, South Korea, the Netherlands, and France, India, Taiwan.