Economics Test 2 Study

Front 1

area of decreasing marginal cost

Back 1

Any quantity of production before the minimumpoint on the marginal cost function; i.e., beforethe inflection point on the total cost function.The area of increasing returns.

Front 2

Area of decreasing returns

Back 2

Any quantity of production beyond the point of diminishing returns. The area of increasing marginal cost.

Front 3

area of increasing marginal cost

Back 3

Any quantity of production beyond the minimum point on the marginal cost function; i.e., beyond the inflection point on the total cost function.The area of decreasing returns.

Front 4

area of increasing returns

Back 4

Any quantity of production before the point of diminishing returns. The area of decreasing marginal cost

Front 5

artificial barrier to trade

Back 5

A non-economic barrier to a market such as a union contract, an intellectual property law, or crime.

Front 6

asymptote

Back 6

A function which continuously approaches a line or axis without meeting it at any finite distance; e.g., an indifference curve or average fixed cost function. Technically, a tangent at infinity.

Front 7

asymptotic

Back 7

What happens if you get scared half-to-death -- twice.

Front 8

auction with reserve

Back 8

The seller reserves the right to influence the price by setting a minimum price, using a shill, or withdrawing the item prior to the falling of the gavel.

Front 9

average costs (AC)

Back 9

Total costs (TC) divided by the number of units produced (q).

Front 10

average fixed cost function

Back 10

An asymptote found by dividing fixed cost by the number of units produced.

Front 11

black market

Back 11

An illegal transaction; i.e., the sale of a prohibited good or service.

Front 12

break-even point

Back 12

Where total revenue (TR) equals total cost (TC).

Front 13

capacity point

Back 13

The optimal level of production, when all factors of production are being employed at their highest and best use. The minimum point on the average cost curve.

Front 14

capitalism

Back 14

A legal system that safeguards private property and permits free enterprise without government interference.

Front 15

cardinal numbers

Back 15

Numbers that assign specific value; e.g., 1, 2, 10. (see ordinal numbers)

Front 16

cartel

Back 16

A syndicate of two or more firms that divide up the market (by geography, quantity, or product differentiation) for the purpose of colluding. (see collusion)

Front 17

caveat emptor

Back 17

(Latin) In business, let the buyer beware. In economics, this term encapsulates the essence of the market system; i.e., that everyone must be responsible for his or her own economic decisions.

Front 18

ceteris paribus

Back 18

Latin) All else remains constant. Examining the changes in two or three variables while assuming that all other variables do not change.

Front 19

collusion

Back 19

Two or more firms acting in concert to manipulate the market to their benefit, thereby adversely affecting the consumer. (see mergers and acquisitions, cartel, and price fixing)

Front 20

complementary goods

Back 20

When the use of one good requires the use of another ; i.e., they are mutually dependent. (see substitution good, factor good, and interdependent markets)

Front 21

concave vs. convex

Back 21

A description of a curvilinear function as per its relationship to a point of reference. A bowl is concave relative to the ceiling, but convex relative to the table it sits on. The lunar surface is convex from the perspective of the earth, but concave relative to the center of the moon.

Front 22

conspicuous consumption

Back 22

Thorstein Veblen’s thesis that some goods are preferred to others because of their social implications; i.e., that prestige is afforded as a function of price.(see reverse substitution effect)

Front 23

constant costs

Back 23

Marginal costs (per unit) that remain the same regardless of the number of units produced

Front 24

consumer price line

Back 24

The average revenue function; the demand curve.

Front 25

consumer surplus

Back 25

Utility received, but not paid for.

Front 26

consumption good

Back 26

A good or service used by the household sector. (see investment good)

Front 27

demand

Back 27

Both the ability and willingness to enter the market at some specific price. (see effective demand)

Front 28

differentiated products

Back 28

Competitive goods made different by physical characteristics or distinguished by advertising. (see homogenous products)

Front 29

diminishing marginal utility

Back 29

(see law of diminishing marginal utility

Front 30

Duopoly

Back 30

Two producers.

Front 31

Dutch auction

Back 31

A reverse auction, where the offering price begins high and proceeds down until there is a buyer

Front 32

effective demand

Back 32

Both the ability and willingness to pay the current market price. (see demand)

Front 33

elasticity

Back 33

Responsiveness of a dependent variable to a change in an independent variable.In economics, Q = f (P)

Front 34

entitlement

Back 34

A unilateral transfer payment from the government to the household sectorrequired by law. (see unilateral transfer payment and welfare)

Front 35

entrepreneurial capacity constraint

Back 35

Milton Friedman’s explanation of how decreasing cost industries eventually experience diminishing returns when “reach exceeds the grasp” of the CEO. When an organization becomes so vertical that a decision to innovate becomes confused in communication, enthusiasm for change lost in translation, and feedback from subordinates too muffled to be heard

Front 36

equilibrium price

Back 36

The price that clears the market; i.e., the price at which the quantity supplied equals the quantity demanded. The quintessence of supply and demand theory.

Front 37

equilibrium theory

Back 37

Leon Walras’ synthesis of two disparate mathematical concepts; i.e., supply and demand. Arguably the most important natural law of economics, whether applied to a market (partial equilibrium) or an economy (general equilibrium).

Front 38

excess profit

Back 38

The accounting profit in excess of normal profit.

Front 39

factor good

Back 39

A good used in the production of another good. When a change in the market price of a good (e.g., autos) affects the market price of a factor good (e.g., steel), the two goods are said to be interdependent. (see intermediate good, factors of production, substitution good, complementary good, and interdependent markets)

Front 40

fixed cost (FC)

Back 40

A cost that is incurred regardless of the level of production; i.e., even if output were zero. The height of the total cost function; i.e., where TC crosses the vertical axis

Front 41

fixed supply

Back 41

Totally inelastic supply; i.e., the quantity supplied remains the same regardless of price.(see price taker)

Front 42

free enterprise

Back 42

A market that permits free entry and free exit by buyers and sellers. A market without artificial barriers to trade. (see free entry and free exit)

Front 43

free entry

Back 43

The absence of artificial (non-economic) barriers to entering a market; e.g., patents, copyrights, trademarks, crime, tariffs, licenses, etc. (see free enterprise and free exit)

Front 44

free exit

Back 44

The absence of artificial (non-economic) barriers to leaving a market; e.g., government regulation,union contract, legal injunction, etc. (see free enterprise and free entry)

Front 45

frontier line

Back 45

production possibilities curve

Front 46

Giffen good

Back 46

inferior good

Front 47

government paternalism

Back 47

The condition that exists when the political leadership believes that the principle of caveat emptor cannot or should not be relied upon

Front 48

height of a function

Back 48

Where a function intersects the y-axis when x = 0

Front 49

homogeneity

Back 49

The condition that exists when all physical characteristics are identical
(Standardized)

Front 50

homogenous products

Back 50

Goods standardized by government regulation or industrial convention.(see differentiated products)

Front 51

incidence of a tax

Back 51

The ultimate burden of a tax. The tax paid that would otherwise be captured by the buyer or seller if there were no tax

Front 52

income effect

Back 52

When the price of a good is decreased and it thereby increases real income, and, as a result, the quantity demanded is increased. (see substitution effect, superior good, and reverse income effect)

Front 53

income redistribution

Back 53

The result of a change in government policy whereby one group or sector is made better off by making another group or sector worse off; e.g., a Robin Hood scheme

Front 54

indifference curve

Back 54

A function that shows how much of one good it takes to make someone ambivalent to a given amount of some other good. An asymptotic isoquant that assumes convexity, rationality, and transitivity

Front 55

inferior good

Back 55

A good that is bought in smaller quantities as real income increases, or vice versa; a Giffen good. (see superior good and reverse income effect)

Front 56

inflection point

Back 56

The point on a function where the course changes from clockwise (cw) to counterclockwise (ccw), or from ccw to cw. A point on a function formed by the tangency of two arcs. (see Note F, No 9)

Front 57

interdependent markets

Back 57

To the extent that a price change in one market affects either the supply or demand in another market, the two markets are said to be interdependent. (see complementary good, substitution good, and factor good)

Front 58

isoquant

Back 58

A curve that shows the various combinations of inputs that will produce the same amount of output

Front 59

law of demand

Back 59

Alfred Marshall’s law of downward sloping demand;i.e., the quantity demanded increases as the price decreases

Front 60

law of diminishing marginal utility

Back 60

law of diminishing marginal utility

Front 61

law of substitution

Back 61

The assumption in ordinal utility theory that the trading value of each unit increases as the number of units decreases. (see law of diminishing marginal utility)

Front 62

long run

Back 62

The time it takes to change all the factors of production.

Front 63

luxury

Back 63

In economics, a good for which the elasticity of demand is greater than one. (see necessity)

Front 64

Madison Avenue

Back 64

A euphemism for the advertising industry. The street in New York where most of the powerful advertising agencies once had their headquarters

Front 65

marginal cost (MC, TC’ )

Back 65

The change in total cost caused by the production of one additional unit

Front 66

marginality

Back 66

The concept of slope or differential calculus; also called the marginal function, the first derivative, y prime (y’), the rise over the run, et. Al

Front 67

marginal revenue (MR, TR’

Back 67

The change in total revenue caused by the sale of one additional unit.

Front 68

marginal utility (MU, TU’ )

Back 68

The change in total utility caused by the onsumption of one additional unit; the slope of TU. (see total utility)

Front 69

market

Back 69

All the potential buyers and sellers of a particular good or service. (see market price)

Front 70

market price

Back 70

The competitively arrived at price of one good, in one place, at one time.

Front 71

mergers and acquisitions

Back 71

In economics, explicit forms of collusion which may be scrutinized by the Anti-trust Division of the U.S. Justice Department for evidence of behavior that threatens competitive markets. (see collusion)

Front 72

minimum average cost

Back 72

The capacity point; i.e., an optimal level of production where output cannot be increased without increasing the average cost per unit. Where MC = AC. Where the slope of a vector from the origin is equal to the slope of the total cost function

Front 73

minimum marginal cost

Back 73

The inflection point on the total cost function; i.e., the point of diminishing returns

Front 74

minimum price line

Back 74

The marginal cost function; the price below which a rational producer will not sell.

Front 75

minimum wage

Back 75

Based on the Fair Labor Standards Act of 1938, the minimum compensation that may be agreed to by employers and employees

Front 76

momentary period

Back 76

In economics, when the market supply is fixed. (see short run and long run)

Front 77

Monopoly

Back 77

A single seller ; i.e., with no close substitutes

Front 78

monopsony

Back 78

A single buyer (Govt. buying submarines)

Front 79

MPP (Marginal Physical Product)

Back 79

Extra output. The difference between the current output and the previous output

Front 80

MU/P ratio

Back 80

Satisfaction per dollar spent. (see marginal utility)

Front 81

MU/P ratio standard

Back 81

The unique MU/P ratio that an individual consumer requires with each purchase

Front 82

mutually exclusive vs. mutually dependent

Back 82

(see substitution goods and complementary goods)

Front 83

necessity

Back 83

In economics, a good for which the elasticity of demand is less than one. (see luxury)

Front 84

negative income tax

Back 84

Milton Friedman’s proposal that would replace welfare entitlement programs with automatic payments from the IRS to those with incomes below the poverty line, thereby eliminating unnecessary bureaucracies

Front 85

normal good

Back 85

In demand theory, a good or service which has two characteristics, both of which are necessary conditions: a substitution effect and an income effect

Front 86

normal profit

Back 86

The amount of accounting profit required to maintain a business without attracting competitors

Front 87

oligopoly

Back 87

A few sellers

Front 88

oligopsony

Back 88

A few buyers

Front 89

ordinal numbers

Back 89

Numbers that assign rank; e.g., first, second, tenth. (see cardinal numbers)

Front 90

OSHA

Back 90

Occupational Safety and Health Administration

Front 91

peak-load pricing

Back 91

A legal form of price discrimination whereby buyers pay more during periods of high demand; e.g., airlines, telephones

Front 92

perfect competition

Back 92

Alfred Marshall’s theory of markets demonstrating that an economy will eventually optimize the use of its scarce productive resources if no single firm can significantly affect the market price, goods are standardized, and there are no artificial barriers to trade

Front 93

point of diminishing returns

Back 93

The minimum point on the marginal cost function.The inflection point on the total cost or variable cost function. The benchmark beyond which a business must go to maximize profits. (see law of diminishing returns

Front 94

preliminary injunction

Back 94

An order that may be issued at the outset of a case if the judge believes that the prima facie evidence is substantially valid and that the plaintiff will untilmately prevail against the defendant, thereby resulting in a permanent injunction

Front 95

price discrimination

Back 95

The act of inducing different buyers to pay different prices for the same good

Front 96

price fixing

Back 96

The elimination of price competition through illegal collusion, regulated monopolies, or government permitted “fair trade” pricing. (see collusion)

Front 97

price line

Back 97

(see consumer price line and producer price line)

Front 98

price maker

Back 98

The buyer if demand is totally elastic (e.g., wheat) or supply is totally inelastic (e.g., a rare painting); the seller if supply is totally elastic (e.g., paper clips) or demand is totally inelastic (e.g., salt). (see price taker)

Front 99

price taker

Back 99

The buyer if demand is totally inelastic or supply is totally elastic; the seller if supply is totally inelastic or demand is totally elastic. (see price maker)

Front 100

prima facie

Back 100

(Latin) At first view; so far as it first appears

Front 101

producer price line

Back 101

The marginal cost function; i.e., the minimum price the seller can charge and still cover marginal cost

Front 102

production possibilities curve

Back 102

The frontier line of maximum output possible when all available factors of production are fully employed at their highest and best use;i.e., when all goods and services are produced at the minimum average cost.

Front 103

profit maximization point

Back 103

Where marginal cost (MC) equals marginal revenue (MR).

Front 104

profit theory

Back 104

Any model that explains how a business enterprise maximizes profit. (see theory of the firm)

Front 105

rationality

Back 105

The assumption in ordinal utility theory that more is preferred to less

Front 106

reverse income effect

Back 106

When the price of a good is decreased and it thereby increases real income, and, as a result, the quantity demanded is decreased. (see income effect and inferior good)

Front 107

reverse substitution effect

Back 107

When the price of a good is increased and it thereby becomes an attractive alternative to another good previously purchased. (see substitution effect and conspicuous consumption)

Front 108

satiation point

Back 108

The point on a total utility function where satisfaction is maximized; i.e., where marginal utility equals zero.

Front 109

Sherman Anti-Trust Act

Back 109

The 1890 law that makes monopolistic restraint of trade illegal

Front 110

shill

Back 110

An agent of the seller.

Front 111

Short-run

Back 111

The time it takes to change some, but not all, factors of production. (i.e. when there are both fixed and variable inputs)

Front 112

shut-down point

Back 112

Where total revenue (TR) equals variable cost (VC)

Front 113

standardized products

Back 113

homogenous products

Front 114

stare decisis

Back 114

The decision stands. All future decisions must be in common with the previous decision.

Front 115

Subsidy

Back 115

A unilateral transfer payment from the government to the business sector. (see welfare)

Front 116

substitution effect

Back 116

When the price of a good is decreased and it thereby becomes an attractive alternative to another good previously purchased, and, as a result, the quantity demanded is increased. (see income effect and reverse substitution effect)

Front 117

substitution good

Back 117

When the use of one good precludes the use of another; i.e., they are mutually exclusive. (see complementary good, factor good, and interdependent markets)

Front 118

superior good

Back 118

A good that is bought in larger quantities as real income increases, or vice versa; i.e., a normal income effect. (see income effect and inferior good)

Front 119

supply curve

Back 119

A horizontal aggregation of marginal cost functions beyond the point of diminishing returns for all member firms in a market

Front 120

Tariff

Back 120

A tax on imports; i.e., a customs duty

Front 121

Temporary Restraining Order (TRO)

Back 121

This order may be issued ex parte (without the defendant) if the judge believes the alleged danger is imminent and potential damage irreparable

Front 122

theory of the firm

Back 122

Alfred Marshall’s profit theory; i.e., an explanation of how a business maximizes profit

Front 123

tie-in-sales

Back 123

A transaction whereby the initial sale (usually low-priced) requires an additional purchase of a related good or service only from the original seller; e.g., Polaroid cameras, video game systems, or home alarm services

Front 124

total cost (TC)

Back 124

Fixed cost (FC) plus variable cost (VC)

Front 125

total revenue (TR)

Back 125

Price times quantity

Front 126

total utility (TU)

Back 126

The total satisfaction derived from all units consumed. (see marginal utility)

Front 127

transitive

Back 127

Mathematically logical

Front 128

unilateral transfer payment

Back 128

A payment for which there is no return good or service. (see entitlement, welfare, and subsidy

Front 129

Util

Back 129

An introspective unit of satisfaction; i.e., a quantitative measure of utility that considers one’s own feelings

Front 130

utility

Back 130

The satisfaction derived from consuming a good or service

Front 131

utility commission

Back 131

A government agency, whose members, appointed by a governor, establish prices and service standards for natural monopolies such as water and power.

Front 132

variable cost (VC)

Back 132

A cost that is zero at zero production and increases as production increases

Front 133

Welfare

Back 133

A unilateral transfer payment made to the household sector. (see unilateral transfer payment, entitlement, and subsidy.)

Front 134

welfare economics

Back 134

The study of public policy from the perspective of consumer benefit

Front 135

welfare effects

Back 135

The ultimate impact of political, social, or economic behavior on price, quantity, average cost, excess profit, and, ultimately, consumer surplus

Front 136

welfare effects

Back 136

The ultimate impact of political, social, or economic behavior on price, quantity, average cost, excess profit, and, ultimately, consumer surplus

Front 137

welfare triangle

Back 137

Vilfredo Pareto’s description of consumer surplus. (see consumer surplus)