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Final Exam - Flashcards

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Class:ECON 2005 - Principles of Economics
Subject:Economics
University:Virginia Polytechnic Institute And State University
Term:Spring 2013
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opportunity cost the best alternative that we forgo, or give up, when we make a choice or a decision
fallacy of composition people often make the mistake of thinking that what is true or best for one person is necessarily true for all
model a formal statement of a theory, usually a mathematical statement of a presumed relationship between two or more variables; a simplified version of the world used to make predictions or test relationships

variable a measure that can change from time to time or form observation to ovservation
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marginalism the process of analyzing the additional or incremental costs or benefits arsing from a choice or decision
sunk costs costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred
absolute advantage to be "absolutely" better at something; a producer has an absolute advantage over another in the production of a good or service if it can produce that product using fewer resoruces
comparative advantage to be "comparatively" better at something (I know, not very useful);  a producer has a comparative advantage over another in the production of a good or service if it can produce that product at a lower opportunity cost
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economics the study of how individuals and societies choose to use the scares resources to satisfy unlimited wants
capital things that are themselves produced and that are then used in the production of other goods and services
factors of production the inputs into the process of production.  AKA resources or inputs.
production the process that transforms scarse resources into useful goods and ervices
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outputs usable products (goods and services)
production possibility frontier (PPF) a graph that shows all the combinations of goods and services that can be produced if all of society's resources are used efficiently.
marginal rate of transformation (MRT) the slope of the production possibility frontier (ppf)
economic growth an increase in the total output of an economy; it occurs when a society acquires new resources or when it learns to produce more using existing resources
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consumer goods goods produced for present consumption
capital goods goods that are used in the production of other goods and services
investment the process of using resources to produce new capital
traditional economy an economy in which tradition alone determines the nature of economic activity
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command economy an economy in which a central government either directly or indirectly sets output targets, incomes, and prices
laissez-faire or market economy (aka pure capitalism) literally from the French:  "allow [them] to do;"  an economy in which individual people and firms peruse their own self-interests without any central direction or regulation; the market determines what is produced, how it is produced, and who gets it
market the institution through which buyers and sellers interact and engage in exchange
consumer sovereignty the idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase)
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free enterprise the freedom of individuals to start and operate private businesses in search of profits
households consume outputs, supply inputs
firms organizations that transforms resources (inputs) into products (outputs)
product or output markets the markets in which goods and services are exchanged (Households demand, firms supply)
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input or factor markets the markets in which the resources used to produce products are exchanged (households supply, firms demand)
labor market the input/factor market in which households supply work for wages to firms that demand labor
capital market the input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand to buy capital goods
land market the input/factor market in which households supply land or other real property in exchange for rent
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demand schedule a table showing how much of a given product a household would be willing to buy at different prices (during a fixed time period).
demand curve a graph illustrating how much of a given product a household would be willing to buy at different prices (giving a fixed time period)
law of demand the negative relationship between price and quantity demanded:
as price rises, quantity demanded decreases (ceteris paribus)
In other words, as we move UP the demand curve.  As price falls, quantity demanded increases (ceteris paribus).  In other words, we move DOWN the demand curve
market demand the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service
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income the sum of all a household's wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time (it is a flow measure)
wealth or net worth the total value of what a household owns minus what it owes.  (it is a stock measure)
normal goods goods for which demand goes up when income is higher and for which demand goes down when income is lower (D curve shifts out as income rises)
ex:  music, movies, clothes, most stuff
inferior goods good for which demand tends to fall when income rises (D curve shifts back as income rises)
ex:  potatoes, ramen noodles, genesee cream ale, generic anything, used cars
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substitutes good that can serve as replacements for one another:  when the price of one increases, demand for the other goes up (bacon and sausage)
perfect substitutes identical or interchangeable products (copper, chemicals, ect)
complements, complementary goods good that "go together":  a decrease in the price of one results in an increase in demand for the other, and vice versa (peanut butter and jelly)
shift of a demand curve the change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good.  the shift brought about by a change in the "original conditions"
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movement along a demand curve the change in quantity demanded brought about by a change in price
quantity supplied the amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period
supply  a relation between the price of a good and the quantity of that good firms are willing and able to sell per period, other things constant
law of supply the positive relationship between price and quantity of a good supplied:  An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will elad to a decrease in quantity supplied
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supply schedule a table showing how much of a product firms will sell at different prices)
supply curve a graph illustrating how much of a product a firm will set at different prices
market supply the sum of all that is supplied each period by all producers of a single product
what are shifts the supply curve? 1. a change in technology
2. a change in the price of inputs
3. change in the price of other (alternative) goods
4. change in producer expectations 
5. change in the number of proudcers
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movement along the supply curve the change in quantity supplied brought about by a change in price
shift of a supply curve the change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good.  the shift is brought about by a change in the original conditions (the five things that affect supply)
equilibrium the condition that exists when quantity supplied and quantity demanded are equal.  at equilibrium, there is no tendency for price to change
excess demand or shortage the condition that exists when quantity demanded exceeds quantity supplied at the current price
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excess supply or surplus the condition that exists when quantity supplied exceeds quantity demanded a the current price
price rationaing the process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied
what does the govt. do to shift demand back (demand on lumber example)? they can increase taxes on new housing projects or put limits or taxes on exports of lumber 
what does the govt. do to shift the supply out (supply of lumber example)? they could free up more land for lumber, lower tariffs or get rid of quotas on lumber from Canada
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price ceiling a maximum price that sellers may charge for a good, usually set by government
price floor a minimum price below which exchange is not permitted
elasticity a general concept used to quantify the response in one variable when other variable changes.

elasticity of A with respect to B = % change in A / % change in B
price elasticity of deamand the ratio of the percentage of change in quantity demanded to the percentage of change in price measures the responsiveness of quantity demanded to changes in price

price elasticity of demand = % change in quantity demanded / % change in price
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midpoint formula for a precise calculation of elasticity, we use the value halfway between p1 and p2 for the base in calculating the percentage change in the price, and the value halfway between q1 and q2 as the base for calculating the percentage change in quantity demanded 

% change in quantity demanded = change in quantity demanded / (q1+q2)/2 *100%
=q2-q1/(q1+q2)/2 *100%
perfectly elastic demand demand for which quantity drops to zero at the slightest increase in price.  infinitely responsive demand
elastic demand demand for which the percentage change in quantity demanded is larger in absolute value than the percentage change in price (a demand elasticity with an absolute value greater than 1.  very responsive demand (Ed<-1)
unitary elasticity demand for which the percentage change in quantity of a product demanded is the same as the percentage change in price in absolute value (a demand elasticity of -1 (Ed= -1) sort of responsive demand
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inelastic demand demand for which the percentage change in quantity demanded is less in absolute value than the percentage change in price.  inelastic demand always has a numerical value between zero and -1 (-1<Ed<0).  not very responsive demand
perfectly inelastic demand demand for which quantity demanded does not respond at all to a change in price (Ed= 0). not at all responsive demand
price elasticity of supply a measure of the response of quantity of a good supplied to a change in price of that good.  likely to be positive in output markets.

elasticity of supply = % change in quantity supplied / % change in price
income elasticity of demand measures the responsiveness of demand to changes in income

income elasticity of demand= % change in quantity demanded / % change in income
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income elasticity of demand for normal goods is positive
income elasticity of demand for inferior goods is negative
cross-price elasticity of demand a measure of the response of the quantity of one good demanded to a change in the price of another good

cross-price elasticity of demand = % change in quantity of X demanded / % change in price of Y
If the cross price elasticity of demand is positive then the goods are SUBSTITUTES
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If the cross price elasticity of demand is negative then the goods are COMPLEMENTS
utility the level of satisfaction or happiness a consumer derives from the consumption of a good or service
marginal utility (MU) the additional satisfaction gained by the consumption or use of one more unit of something

MU= change in TU / change in Q
total utility (TU) the total amount of satisfaction obtained from the consumption of a good or service

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law of diminishing marginal utility (LDMU) the more of any one good a person consumes per period, the less additional satisfaction (utility) generated by consuming each additional (marginal) unit of the same good (holding the consuption of all other goods and services constant)

the more you consume of a good, the less utility you get out of each additional unit consumed (all else equal)
budget constraint the limits imposed on household choices by income, wealth, and product prices (aka budget line)
choice set (aka opportunity set) all combinations of goods that a household can afford (i.e. all bundles of good that lie inside or on the budget constraint)
real income  set of opportunities to purchase real goods and services available to a household as determined by prices and money income
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the utility-maximizing rule MUx / Px = MUy Py for all pairs of goods and all income must be spent
the income effect when the price of something falls, we are better off; our REAL INCOME rises as prices fall

when the price of something rises, we are worse off; our REAL INCOME falls as price rises
the substitution effect if the price of one good falls, that good becomes less expensive relative to substitutes, we are likely to buy more of the good whose price fell and less of other goods

if the price of one good rises, that good becomes more expensive relative to substitutes, we are likely to buy less of the good whose price rose and more of other goods
perfectly progressive tax system one in which, after taxes and redistribution, all people receive the same income
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consumer surplus the difference between the maximum amount a person is willing to pay for a good and its current market price
diamond/ water paradox a paradox stating that
1. the things with the greatest value in use frequently have little to no value in exchange
2. the things with the greatest value in exchange frequently have little or no value in use
producer surplus the difference between the current market and the full cost of production for the firm
deadweight loss occurs when the cost to society of a good (represented by the supply curve) is not equal to the benefit to society of that good (represented by the demand curve)
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production  the process by which inputs are combined, transformed, and turned into outputs
profit (economic profit) the difference between total revenue and total (economic) cost
firms economic units formed by profit-seeking entrepreneurs who employ resources to produce goods and services for sale
we assume that all firms want to maximize profits
total revenue the amount received from the sale of the product
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normal profit (aka zero economic profit) the accounting profit earned when all resources earn their opportunity cost; this occurs when total revenue = total economic cost
optimal method of production  the production method that minimizes cost
explicit costs opportunity cost of resources employed by a firm that takes the form of cash payments
implicit costs a firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment
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production technology the relationship between inputs and outputs -- how inputs get turned into outputs 
labor-intensive technology technology that relies heavily on human labor instead of capital
capital-intensive technology technology that relies heavily on capital instead of human labor
production function or total product function the relationship between the amount of resources (inputs) employed and a firm's total product (output)
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marginal product the additional output that can be produced by adding one more unit of a specific input, ceteris paribus
average product the average amount produced by each unit of a variable factor of production (input)
law of diminishing marginal returns when additional units of a variable input are added to fixed inputs, after a certain point the marginal product of the variable input declines
short run the period of time for which two conditions hold:  the firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry
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long run that period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry
fixed cost (FC) any cost that does not depend on the firm's level of output (Q)
sunk costs another name for fixed cost in the short run because firms have no choice but to pay them
total fixed costs (TFC or FC) the total of all costs that do not change with output, even if the output is zero
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average fixed cost (AFC) total fixed cost divided by the number of units of output; a per-unit measure of fixed costs 

AFC = TFC / q
spreading overhead the process of dividing total fixed costs by more units of output; Average fix cost declines as quantity rises
variable cost a cost that depends on the level of production chosen (Q)
total variable cost (TVC or VC) the total of all costs that vary with output in the short run
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average variable cost (AVC) total variable cost divided by the  number of units of output

AVC = TVC / q
total cost (TC) fixed costs plus variable costs
average total cost (ATC) or just average cost (AC) total cost divided by the number of units of output
short run the period over which the cost of one or more economic inputs is fixed.
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long run the period over which all costs are variable
marginal cost (MC) the increase in total cost that results from producing one more unit of output; marginal costs reflect changes in variable costs only since fixed costs do not change

MC = change in TC / change in Q
long-run average cost curve (LRAC) a curve that indicates the lowest average cost of production at each rate of output when the size or "scale" of the firm is allowed to vary
increasing returns to scale, or economies of scale an increase in a firm's scale of production leads to lower costs per unit produced
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constant returns to scale an increase in a firm's scale of production has no effect on costs per unit produced
decreasing returns to scale, or diseconomies of scale an increase in a firm's scale of production leads to higher costs per unit produced
perfect competition an industry structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run
homogeneous or standardized products (aka commodities) undifferentiated products; products that are identical to, or indistinguishable from one another
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five characteristics of perfectly competitive markets: 1. there are many small firms and many small consumers
2. the firms sell a homogeneous product (commodity) 
3. everyone (buyers and sellers) has access to full information
4. there is unrestricted entry and exit to the market, (but not necessarily "costless")
5. prices are not fixed or regulated by the state
operating profit (or loss) or net operating revenue total revenue minus total variable cost
(TR-TVC)
shut-down point the lowest point on the average variable cost curve; when price falls below the minimum point on AVC, total revenue is insufficeint to cover variable costs and the firm will shut down and bear losses equal to fixed costs
short-run industry supply curve the sum of the marginal cost curves (above AVC) of all the firms in an industry
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long-run competitive equilibrium when P = SRMC = SRAC =LRAC and profits are zero
long-run industry supply curve (LRIS) a graph that traces out price and total output over time as an industry expands
market failure occurs when resources are misallocated, or allocated inefficiently; the result is a waste or lost value
sources of market failure 1. imperfect market structure, or noncompetitive behavior
2. imperfect information
3. the existence of public goods, and 
4. the presence of external costs and benifits
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imperfect competition an industry in which the single firms have some control over price and competition; imperfectly competitive industries give rise to an inefficient allocation of resources
monopoly an industry composed of only one firm that produces a product for which there are no close substitutes and in which significant barriers exist to prevent new firms from entering the industry
imperfect information the absence of full knowledge concerning product characteristics, available prices, and so forth
public goods, or social goods goods or services that bestow collective benefits on members of society; generally, no one can be excluded from their benifits
ex: national defense
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private goods products produced by firms for sale to individual households
externalities a cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction
imperfectly competitive industry an industry in which single firms have some control over the price of their output
market power an imperfectly competitive firm's ability to raise price without losing all of the quantity demanded for its product
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pure monopoly an industry with a single firm that produces a product for which:
1. there are no close substitutes and
2. significant barriers to entry exist to prevent other firms from entering the industry to compete for profits
barriers to entry something that prevents new firms from entering and competing in imperfectly competitive industries
price discrimination charging different prices to different buyers
perfect price discrimination occurs when a firm charges the maximum amount that buyers are willing to pay for each unit; also called "first degree" price discrimination
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second degree price discrimination occurs when firms change different prices based on unobservable consumer attributes
ex:  costco or sam's club-- these firms extract some consumer surplus by charging membership fees that allow you to buy large quantities for cheap
ex:  quantity discounts
monopolistic competition a common form of industry (market) structure in the US, characterized by a large number of firms, none of which can influence market price by virtue of size alone; some degree of market power is achieved by firms producing differentiated products; new firms can enter and established firms can exit such an industry with ease
product differentiation a strategy that firms use to achieve market power
oligopoly a form of industry (market) structure characterized by a few dominant and interdependent firms
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collusion the act of working with other producers in an effort to limit competition and increase joint profits
cartel a group of firms that gets together and makes joint price and output decisions to maximize joint profits
tacit collusion collusion occurs when price and quantity fixing agreements among producers are explicit;  tacit collusion occurs when such agreements are implicit
price leadership a form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy
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kinked demand curve model a model of oligopoly in which the demand curve facing each individual firm has a "kink" in it;  the kink results from the assumption that competitor firms will follow if a single firm cuts price but will not follow if a single firm raises price
cournot model a model of a two-firm industry (duopoly) in which a series of output adjustment decisions leads to a final level of output between the output that would prevail if the market were organized competitively and the output that would be set by a monopoly
perfectly contestable market a market in which entry and exit are costless
dominant strategy in game theory, a strategy that is best no matter what the opposition does
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prisoners' dilemma a game in which the players are prevented from cooperating and in which each has a dominant strategy that leaves them both worse off than if they could cooperate
maximin strategy in game theory, a strategy chosen to maximize the minimum gain that can be earned
basically, players choose the strategy that has the most attractive "worst case" scenario
nash equilibrium in game theory, the result of all players' playing their best strategy given what their competitors are doing
tit-for-tat strategy a company's strategy that lets a competitor know the company will follow the competitor's lead, a player in one round simply mimics the player's behavior in the previous round--it's the optimal strategy for getting the other player to cooperate
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federal trade commission (FTC) a federal regulatory group created by congress in 1914 to investigate the sturcture and behavior of firms engaging in the interstate commerce, to determine what constitutes unlawful "unfair" behavior, and to issue cease-and-desist orders to those found in violation of antitrust law
antitrust division (of the Department of Justice) it also empowered to act against violators of antitrust laws; it initiates action against those who violate antitrust laws and decides which cases to prosecute and against whom to bring criminal charges (FTC cannot bring criminal charges)
price-fixing when competitors get together and decide to raise the prices (cartels)
tying contracts making a customer by something from someone else in order to be allowed to buy from you
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exclusive dealing not letting your customers buy from a competitor
interlocking directorates when someone serves on the board for 2 competing firms
consent decrees formal agreements on remedies among all the parties to an antitrust case that must be approved by the courts; consent decrees can be signed before, during or after a trial
Herfindahl-Hirschman Index (HHI) a mathematical calculation that uses market share figures to determine whether or not a proposed merger will be challenged by the government
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concentrated (HHI) challenge if index is raised more than 50 points by the merger 
anything above 1,800
moderate concentration (HHI) challenge if index is raised by more than 100 points by the merger
anything between 1,000 and 1,800
unconcentrated (HHI) no challenge
anything below 1,000
trust an arrangement in which shareholders of independent firms agree to give up thier stock in exchange for trust certificates that entitle them to a share of the trust's common profits; a group of trustees then operates the trust as a monopoly controlling output and setting price
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interstate commerce commission (ICC) a federal regulatory group created by Congress in 1887 to oversee and correct abuses in the railroad industry
sherman act passed by Congress in 1890, the act declared every contract or conspiracy to restrain trade among states or nations illegal and declared any attempt at monopoly, successful or not, a misdemeanor
rule of reason  the criterion introduced by the Supreme Court in 1911 to determine whether a particular action was illegal ("unreasonable") or legal ("reasonable") within the terms of the Sherman Act.  Under this rule, "mere size was not an offense" and behavior was the key
clayton act passed by Congress in 1914 to strengthen the Sherman act and clarify the rule of reason, the act outlawed specific monopolistic behaviors such as tying contracts, price discrimination, and unlimited mergers
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wheeler-lea act extended the language of the federal trade commission act to include "deceptive" as well as "unfair' methods of competition
per se rule a rule enunciated by the courts declaring a particular action or outcome to be a per se (intrinsic) violation of antitrust law, whether the rationale are reasonable or not.
pure monopoly -one firm controls the market
-block entry
dominant firm -one firm: more than half market share
-no close rival

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tight oligopoly -top 4 firms:  more than 60% of market output
-evidence of coppperation
effective competition -low concentration
-low barriers to entry
-little or now collusion
insourcing making your inputs yourself
outsourcing buying inputs from elsewhere
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vertical integration "insourcing" expansion into earlier / later stages of production

bounded rationality its hard for a manager to keep track of all the stages (typical in vertical integration)
market failure occurs when resources are misallocated, or allocated inefficiently; the result is waste or lost value
sources of market failure 1. imperfect market structure, or noncompetitive behavior
2. imperfect information
3. the existence of public goods
4. the presence of external costs and benifits
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imperfect information the absence of full knowledge concerning product characteristics, available prices, and so forth
adverse selection can occur when a buyer or seller enters into an exchange with another party who has more information; this can also be seen as "hidden characteristics" problem
signaling is an attempt by the informed side to communicate valuable information that is otherwise hidden
screening is just the employer looking for these signals
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moral hazard arises when one party to a contract alters their behavior in a costly manner because the cost of that behavior has been passed on to the other party to the contract
the winner's curse if the item you win turns out not to be worth as much as you think it is, then the "winner" of the auction is really a "loser"
behavioral economics psychology + econ
-people are not robots and may make mistakes
-don't always maximize utility 
unbounded willpower even if we know what's "best" for us, we are often too lazy to do it
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public goods (social or collective goods) goods that are nonrival in consumption and/or their benefits are nonexchangeable or (nonexclusive)
nonrival in consumption one person's enjoyment of the benefits of a public good does not interfere with another's consumption of it
nonexlusive (or nonexcludable): once a good is produced, no one can be exuded from enjoying its benifits
private goods -rival in consumption
-exclusive
-provided by private sector
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public goods -nonrival in consumption
-nonexclusive
-provided by government

natural monopoly ("quasi-private" goods) -nonrival but exclusive
-with congestion these can turn into private goods
-provided by private sector or government
open-access good (aka open resource or common resource good) -rival but nonexclusive
-regulated by government
free-rider problem a problem intrinsic to public goods;  because people can enjoy the benifits of public goods whether they pay for them or not, they are usually unwilling to pay for them
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drop-in-the-bucket problem a problem intrinsic to public goods;  the good or service is usually so costly that its provision generally does not depend on whether or not any single person pays
optimal level of provision for public goods the level at which resources are drawn from the production of other goods and services only to the extent that people want the public goods are willing to pay for it
tieabout hypothesis an efficient mix of public goods is produced when local land / housing prices and taxes come to reflect consumer preferences just as they do in the market for private goods
externality a cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction; sometimes called spillovers, third-party effects, or neighborhood effects
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marginal private cost (MPC) the cost of consumption or production paid by the consumer or firm
marginal damage cost (MDC) the additional harm done by increasing the level of an externality-producing activity (consumption or production) by one unit
marginal social cost (MSC) the total cost to society of producing an additional unit of a good or service:
MSC = MPC +MDC
coase theorem as long as property rights are clearly stated and bargaining costs are minimal, private parties can arrive at the efficient solution regardless of how property is assigned
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injunction a court order forbidding the continuation of behavior that leads to damages
liability rules laws that require A to compensate B for damages imposed
lorenz curve  a widely used graph of the distribution of income, with cumulative percentage of families plotted along the horizontal axis and cumulative percentage of income plotted along the vertical axis
gini coefficient a commonly used measure of inequality of income derived from a Lorenz curve, it can range from 0 to a maximum of 1 and is measured as the area of the region between the Lorenz curve and the 45 degree line divided by the max possible area
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poverty line the officially established income level that distinguishes the poor from the non poor; it is set at "money income" equal to three times the cost of the Department of Agriculture's minimum food budget
human capital the stock of knowledge, skills, and talents that people possess; it can be inborn or acquired through education and training
this explains the income inequality in the "middle of the distribution
compensating differentials differences in wages that result from differences in working conditions; risky jobs usually pay higher wages; highly desirable jobs usually pay lower wages.
property income income from the ownership of real property and financial holdings; it takes the form of profits, interest, dividends, and rents
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transfer payments payments by the government to people who do not supply goods or services in exchange
utilitarian justice the idea that "a dollar in the hand of a rich person is worth less than a dollar in the hand of a poor person"
Rawlsian justice a theory of distributional justice that concludes that the social contract emerging from the "original position" would call for an income distribution that would maximize the well-being of the worst-off member of society.  inequality is acceptable but only if the process that causes it also improves the lot of the poor 
veil of ignorance assume we enter this world not knowing what our social situation will be (rich, poor, ect).  Choosing a system that maximizes the well-being of the worst-off member (which could be you!) is the safest thing to do.
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labor theory of value stated most simply, the theory that the value of a commodity depends only on the amount of labor required to produce it
social insurance where payments from the system are related to payments into the system
income assistance where payments are based solely need
social security system social insurance program that includes three separate programs that are financed through separate trust funds
OASI :  Old age and Survivors Insurance
DI :  Disability Insurance
HI :  Health insurance or medicare
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medicare is an in-kind government transfer programs that provide health and hospitalization benefits to the aged and their survivors and to certain of the disabled, regardless of income
unemployment compensation a state government transfer program that pays cash benefits for a certain period of time to laid-off workers who have worked for a specified period of time for a covered employer
public assistance, or welfare government transfer programs that provide cash benefits to 
1. families with dependent children whose income and assets fall below a very low level, and
2. the very poor regardless of whether or not they have children
medicaid in-kind government transfer programs that provide health and hospitalization benefits to people with low incomes  (like Medicare for the poor)
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food stamps vouchers that have a face value greater than their cost and that can be used to purchase food at grocery stores, only low-income families and individuals are eligible 
housing programs "section 8" subsidized housing, housing projects
the earned income tax credit low income families can actually receive money from the government rather than paying taxes
ability to pay principle those who have more should pay more (progressive tax)
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benefits-received principle those who benefit more from the tax should pay more
tax base what is being taxed
tax structure how it is being taxed
tax revenue the amount of money collected by the government from the tax
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proportional tax a tax whose burden is the same proportion of income for all households (aka flat tax)
progressive tax a tax whose burden, expressed as a percentage of income, increases as income increases
regressive tax a tax whose burden, expressed as a percentage of income, falls as income increases
principle of second best the fact that a tax distorts an economic decision does not always imply that such a tax imposes an excess burden; if there are previously existing distortions (such as an externality or other tax), such a tax may actually improve efficiency
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productivity of an input the amount of output produced per unit of that input
marginal product of labor the additional output produced by one additional unit of labor
marginal revenue product the additional revenue a firm earns by employing one additional unit of input, ceteris parabius
marginal resource cost the change in total cost when an additional unit of a resource is hired, ceteris paribus
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factor substitution effect the tendency of firms to substitute away from a factor whose price has risen and toward a factor whose price has fallen
output effect of a factor price increase (decrease) when a firm decreases (increases) its output in response to a factor price increase (decrease), this decreases (increases) its demand for all factors
labor supply curve a diagram that shows the quantity of labor supplied at different wage rates, its shape depends on how households react to changes in the wage rate
substitution effect dominates the cost of leisure rises and we substitute from leisure into labor
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income effect dominates we demand more leisure as our income rises
absolute advantage the advantage in the production of a product enjoyed by one country of a product enjoyed by one country over another when it uses fewer resources to produce that product than the other country does
comparative advantage the advantage in the production of a product enjoyed by one country over another when that product can be produced at lower cost in terms of other goods than it could be in the other country
law of comparative advantage states that the country that has the lower opportunity cost of producing a good should specialize in the production of that good
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terms of trade the ratio at which a country can trade domestic products for imported products; or how much of one good can be exchanged for one unit of another good
theory of ocmparative advantage Ricardo's theory that specialization and free trade will benefit all trading partners; real wages (what people will buy with their money) will rise
Heckscher-Ohlin theorem a theory that explains the existence of a country's comparative advantages by its factor endowments:  a country has a comparative advantage in the production of a product if that country is relatively well endowed with inputs used intensively in the production of that product
exchange rate the ratio at which two currencies are traded; the price of one currency in terms of another
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trade surplus the situation when a country exports more than it imports
trade deficit the situation when a country imports more than it exports
import quota a limit set by the government on the quantity of a good that can be legally imported into the country
is effective if it is set below the equilibrium quantity of imports
tariff a tax placed on an imported good; they hurt imports
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dumping a firm or industry's sale of products on the world market at prices below the cost of production
Smoot-Hawley tarriff the U.S. tariff law of the 1930s, which set the highest tariffs in U.S. history (60 percent); it set off an international trade ware and caused the decline in trade that is often considered a cause of the worldwide depression of the 1930s
General Agreement on Tariffs and Trade (GATT) an international agreement signed by the U.S. and 22 other countries in 1947 to promote the liberalization of foreign trade this was the precursor to the World Trade Organization which was founded in 1995
U.S.-Canadian Free Trade Agreement an agreement in which the U.S. and Canada agreed to eliminate all barriers to trade between the tow countries by 1998 (signed in 1988)
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North American Free Trade Agreement (NAFTA) an agreement signed by the U.S., Mexico, and Canada in which the tree countries agreed to establish all North America as a free-trade zone
economic integration occurs when two or ore nations join to form a free-trade zone
European Union (EU) the European trading boc composed of 27 European nations, 16 of these nations share a common currency called the Euro
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List View: Terms & Definitions

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 opportunity costthe best alternative that we forgo, or give up, when we make a choice or a decision
 fallacy of compositionpeople often make the mistake of thinking that what is true or best for one person is necessarily true for all
 modela formal statement of a theory, usually a mathematical statement of a presumed relationship between two or more variables; a simplified version of the world used to make predictions or test relationships

 variablea measure that can change from time to time or form observation to ovservation
 marginalismthe process of analyzing the additional or incremental costs or benefits arsing from a choice or decision
 sunk costscosts that cannot be avoided, regardless of what is done in the future, because they have already been incurred
 absolute advantageto be "absolutely" better at something; a producer has an absolute advantage over another in the production of a good or service if it can produce that product using fewer resoruces
 comparative advantageto be "comparatively" better at something (I know, not very useful);  a producer has a comparative advantage over another in the production of a good or service if it can produce that product at a lower opportunity cost
 economicsthe study of how individuals and societies choose to use the scares resources to satisfy unlimited wants
 capitalthings that are themselves produced and that are then used in the production of other goods and services
 factors of productionthe inputs into the process of production.  AKA resources or inputs.
 productionthe process that transforms scarse resources into useful goods and ervices
 outputsusable products (goods and services)
 production possibility frontier (PPF)a graph that shows all the combinations of goods and services that can be produced if all of society's resources are used efficiently.
 marginal rate of transformation (MRT)the slope of the production possibility frontier (ppf)
 economic growthan increase in the total output of an economy; it occurs when a society acquires new resources or when it learns to produce more using existing resources
 consumer goodsgoods produced for present consumption
 capital goodsgoods that are used in the production of other goods and services
 investmentthe process of using resources to produce new capital
 traditional economyan economy in which tradition alone determines the nature of economic activity
 command economyan economy in which a central government either directly or indirectly sets output targets, incomes, and prices
 laissez-faire or market economy (aka pure capitalism)literally from the French:  "allow [them] to do;"  an economy in which individual people and firms peruse their own self-interests without any central direction or regulation; the market determines what is produced, how it is produced, and who gets it
 marketthe institution through which buyers and sellers interact and engage in exchange
 consumer sovereigntythe idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase)
 free enterprisethe freedom of individuals to start and operate private businesses in search of profits
 householdsconsume outputs, supply inputs
 firmsorganizations that transforms resources (inputs) into products (outputs)
 product or output marketsthe markets in which goods and services are exchanged (Households demand, firms supply)
 input or factor marketsthe markets in which the resources used to produce products are exchanged (households supply, firms demand)
 labor marketthe input/factor market in which households supply work for wages to firms that demand labor
 capital marketthe input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand to buy capital goods
 land marketthe input/factor market in which households supply land or other real property in exchange for rent
 demand schedulea table showing how much of a given product a household would be willing to buy at different prices (during a fixed time period).
 demand curvea graph illustrating how much of a given product a household would be willing to buy at different prices (giving a fixed time period)
 law of demandthe negative relationship between price and quantity demanded:
as price rises, quantity demanded decreases (ceteris paribus)
In other words, as we move UP the demand curve.  As price falls, quantity demanded increases (ceteris paribus).  In other words, we move DOWN the demand curve
 market demandthe sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service
 incomethe sum of all a household's wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time (it is a flow measure)
 wealth or net worththe total value of what a household owns minus what it owes.  (it is a stock measure)
 normal goodsgoods for which demand goes up when income is higher and for which demand goes down when income is lower (D curve shifts out as income rises)
ex:  music, movies, clothes, most stuff
 inferior goodsgood for which demand tends to fall when income rises (D curve shifts back as income rises)
ex:  potatoes, ramen noodles, genesee cream ale, generic anything, used cars
 substitutesgood that can serve as replacements for one another:  when the price of one increases, demand for the other goes up (bacon and sausage)
 perfect substitutesidentical or interchangeable products (copper, chemicals, ect)
 complements, complementary goodsgood that "go together":  a decrease in the price of one results in an increase in demand for the other, and vice versa (peanut butter and jelly)
 shift of a demand curvethe change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good.  the shift brought about by a change in the "original conditions"
 movement along a demand curvethe change in quantity demanded brought about by a change in price
 quantity suppliedthe amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period
 supply a relation between the price of a good and the quantity of that good firms are willing and able to sell per period, other things constant
 law of supplythe positive relationship between price and quantity of a good supplied:  An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will elad to a decrease in quantity supplied
 supply schedulea table showing how much of a product firms will sell at different prices)
 supply curvea graph illustrating how much of a product a firm will set at different prices
 market supplythe sum of all that is supplied each period by all producers of a single product
 what are shifts the supply curve?1. a change in technology
2. a change in the price of inputs
3. change in the price of other (alternative) goods
4. change in producer expectations 
5. change in the number of proudcers
 movement along the supply curvethe change in quantity supplied brought about by a change in price
 shift of a supply curvethe change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good.  the shift is brought about by a change in the original conditions (the five things that affect supply)
 equilibriumthe condition that exists when quantity supplied and quantity demanded are equal.  at equilibrium, there is no tendency for price to change
 excess demand or shortagethe condition that exists when quantity demanded exceeds quantity supplied at the current price
 excess supply or surplusthe condition that exists when quantity supplied exceeds quantity demanded a the current price
 price rationaingthe process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied
 what does the govt. do to shift demand back (demand on lumber example)?they can increase taxes on new housing projects or put limits or taxes on exports of lumber 
 what does the govt. do to shift the supply out (supply of lumber example)?they could free up more land for lumber, lower tariffs or get rid of quotas on lumber from Canada
 price ceilinga maximum price that sellers may charge for a good, usually set by government
 price floora minimum price below which exchange is not permitted
 elasticitya general concept used to quantify the response in one variable when other variable changes.

elasticity of A with respect to B = % change in A / % change in B
 price elasticity of deamandthe ratio of the percentage of change in quantity demanded to the percentage of change in price measures the responsiveness of quantity demanded to changes in price

price elasticity of demand = % change in quantity demanded / % change in price
 midpoint formulafor a precise calculation of elasticity, we use the value halfway between p1 and p2 for the base in calculating the percentage change in the price, and the value halfway between q1 and q2 as the base for calculating the percentage change in quantity demanded 

% change in quantity demanded = change in quantity demanded / (q1+q2)/2 *100%
=q2-q1/(q1+q2)/2 *100%
 perfectly elastic demanddemand for which quantity drops to zero at the slightest increase in price.  infinitely responsive demand
 elastic demanddemand for which the percentage change in quantity demanded is larger in absolute value than the percentage change in price (a demand elasticity with an absolute value greater than 1.  very responsive demand (Ed<-1)
 unitary elasticitydemand for which the percentage change in quantity of a product demanded is the same as the percentage change in price in absolute value (a demand elasticity of -1 (Ed= -1) sort of responsive demand
 inelastic demanddemand for which the percentage change in quantity demanded is less in absolute value than the percentage change in price.  inelastic demand always has a numerical value between zero and -1 (-1<Ed<0).  not very responsive demand
 perfectly inelastic demanddemand for which quantity demanded does not respond at all to a change in price (Ed= 0). not at all responsive demand
 price elasticity of supplya measure of the response of quantity of a good supplied to a change in price of that good.  likely to be positive in output markets.

elasticity of supply = % change in quantity supplied / % change in price
 income elasticity of demandmeasures the responsiveness of demand to changes in income

income elasticity of demand= % change in quantity demanded / % change in income
 income elasticity of demand for normal goodsis positive
 income elasticity of demand for inferior goodsis negative
 cross-price elasticity of demanda measure of the response of the quantity of one good demanded to a change in the price of another good

cross-price elasticity of demand = % change in quantity of X demanded / % change in price of Y
 If the cross price elasticity of demand is positivethen the goods are SUBSTITUTES
 If the cross price elasticity of demand is negativethen the goods are COMPLEMENTS
 utilitythe level of satisfaction or happiness a consumer derives from the consumption of a good or service
 marginal utility (MU)the additional satisfaction gained by the consumption or use of one more unit of something

MU= change in TU / change in Q
 total utility (TU)the total amount of satisfaction obtained from the consumption of a good or service

 law of diminishing marginal utility (LDMU)the more of any one good a person consumes per period, the less additional satisfaction (utility) generated by consuming each additional (marginal) unit of the same good (holding the consuption of all other goods and services constant)

the more you consume of a good, the less utility you get out of each additional unit consumed (all else equal)
 budget constraintthe limits imposed on household choices by income, wealth, and product prices (aka budget line)
 choice set(aka opportunity set) all combinations of goods that a household can afford (i.e. all bundles of good that lie inside or on the budget constraint)
 real income set of opportunities to purchase real goods and services available to a household as determined by prices and money income
 the utility-maximizing ruleMUx / Px = MUy Py for all pairs of goods and all income must be spent
 the income effectwhen the price of something falls, we are better off; our REAL INCOME rises as prices fall

when the price of something rises, we are worse off; our REAL INCOME falls as price rises
 the substitution effectif the price of one good falls, that good becomes less expensive relative to substitutes, we are likely to buy more of the good whose price fell and less of other goods

if the price of one good rises, that good becomes more expensive relative to substitutes, we are likely to buy less of the good whose price rose and more of other goods
 perfectly progressive tax systemone in which, after taxes and redistribution, all people receive the same income
 consumer surplusthe difference between the maximum amount a person is willing to pay for a good and its current market price
 diamond/ water paradoxa paradox stating that
1. the things with the greatest value in use frequently have little to no value in exchange
2. the things with the greatest value in exchange frequently have little or no value in use
 producer surplusthe difference between the current market and the full cost of production for the firm
 deadweight lossoccurs when the cost to society of a good (represented by the supply curve) is not equal to the benefit to society of that good (represented by the demand curve)
 production the process by which inputs are combined, transformed, and turned into outputs
 profit (economic profit)the difference between total revenue and total (economic) cost
 firmseconomic units formed by profit-seeking entrepreneurs who employ resources to produce goods and services for sale
we assume that all firms want to maximize profits
 total revenuethe amount received from the sale of the product
 normal profit (aka zero economic profit)the accounting profit earned when all resources earn their opportunity cost; this occurs when total revenue = total economic cost
 optimal method of production the production method that minimizes cost
 explicit costsopportunity cost of resources employed by a firm that takes the form of cash payments
 implicit costsa firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment
 production technologythe relationship between inputs and outputs -- how inputs get turned into outputs 
 labor-intensive technologytechnology that relies heavily on human labor instead of capital
 capital-intensive technologytechnology that relies heavily on capital instead of human labor
 production function or total product functionthe relationship between the amount of resources (inputs) employed and a firm's total product (output)
 marginal productthe additional output that can be produced by adding one more unit of a specific input, ceteris paribus
 average productthe average amount produced by each unit of a variable factor of production (input)
 law of diminishing marginal returnswhen additional units of a variable input are added to fixed inputs, after a certain point the marginal product of the variable input declines
 short runthe period of time for which two conditions hold:  the firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry
 long runthat period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry
 fixed cost (FC)any cost that does not depend on the firm's level of output (Q)
 sunk costsanother name for fixed cost in the short run because firms have no choice but to pay them
 total fixed costs (TFC or FC)the total of all costs that do not change with output, even if the output is zero
 average fixed cost (AFC)total fixed cost divided by the number of units of output; a per-unit measure of fixed costs 

AFC = TFC / q
 spreading overheadthe process of dividing total fixed costs by more units of output; Average fix cost declines as quantity rises
 variable costa cost that depends on the level of production chosen (Q)
 total variable cost (TVC or VC)the total of all costs that vary with output in the short run
 average variable cost (AVC)total variable cost divided by the  number of units of output

AVC = TVC / q
 total cost (TC)fixed costs plus variable costs
 average total cost (ATC) or just average cost (AC)total cost divided by the number of units of output
 short runthe period over which the cost of one or more economic inputs is fixed.
 long runthe period over which all costs are variable
 marginal cost (MC)the increase in total cost that results from producing one more unit of output; marginal costs reflect changes in variable costs only since fixed costs do not change

MC = change in TC / change in Q
 long-run average cost curve (LRAC)a curve that indicates the lowest average cost of production at each rate of output when the size or "scale" of the firm is allowed to vary
 increasing returns to scale, or economies of scalean increase in a firm's scale of production leads to lower costs per unit produced
 constant returns to scalean increase in a firm's scale of production has no effect on costs per unit produced
 decreasing returns to scale, or diseconomies of scalean increase in a firm's scale of production leads to higher costs per unit produced
 perfect competitionan industry structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run
 homogeneous or standardized products (aka commodities)undifferentiated products; products that are identical to, or indistinguishable from one another
 five characteristics of perfectly competitive markets:1. there are many small firms and many small consumers
2. the firms sell a homogeneous product (commodity) 
3. everyone (buyers and sellers) has access to full information
4. there is unrestricted entry and exit to the market, (but not necessarily "costless")
5. prices are not fixed or regulated by the state
 operating profit (or loss) or net operating revenuetotal revenue minus total variable cost
(TR-TVC)
 shut-down pointthe lowest point on the average variable cost curve; when price falls below the minimum point on AVC, total revenue is insufficeint to cover variable costs and the firm will shut down and bear losses equal to fixed costs
 short-run industry supply curvethe sum of the marginal cost curves (above AVC) of all the firms in an industry
 long-run competitive equilibriumwhen P = SRMC = SRAC =LRAC and profits are zero
 long-run industry supply curve (LRIS)a graph that traces out price and total output over time as an industry expands
 market failureoccurs when resources are misallocated, or allocated inefficiently; the result is a waste or lost value
 sources of market failure1. imperfect market structure, or noncompetitive behavior
2. imperfect information
3. the existence of public goods, and 
4. the presence of external costs and benifits
 imperfect competitionan industry in which the single firms have some control over price and competition; imperfectly competitive industries give rise to an inefficient allocation of resources
 monopolyan industry composed of only one firm that produces a product for which there are no close substitutes and in which significant barriers exist to prevent new firms from entering the industry
 imperfect informationthe absence of full knowledge concerning product characteristics, available prices, and so forth
 public goods, or social goodsgoods or services that bestow collective benefits on members of society; generally, no one can be excluded from their benifits
ex: national defense
 private goodsproducts produced by firms for sale to individual households
 externalitiesa cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction
 imperfectly competitive industryan industry in which single firms have some control over the price of their output
 market poweran imperfectly competitive firm's ability to raise price without losing all of the quantity demanded for its product
 pure monopolyan industry with a single firm that produces a product for which:
1. there are no close substitutes and
2. significant barriers to entry exist to prevent other firms from entering the industry to compete for profits
 barriers to entrysomething that prevents new firms from entering and competing in imperfectly competitive industries
 price discriminationcharging different prices to different buyers
 perfect price discriminationoccurs when a firm charges the maximum amount that buyers are willing to pay for each unit; also called "first degree" price discrimination
 second degree price discriminationoccurs when firms change different prices based on unobservable consumer attributes
ex:  costco or sam's club-- these firms extract some consumer surplus by charging membership fees that allow you to buy large quantities for cheap
ex:  quantity discounts
 monopolistic competitiona common form of industry (market) structure in the US, characterized by a large number of firms, none of which can influence market price by virtue of size alone; some degree of market power is achieved by firms producing differentiated products; new firms can enter and established firms can exit such an industry with ease
 product differentiationa strategy that firms use to achieve market power
 oligopolya form of industry (market) structure characterized by a few dominant and interdependent firms
 collusionthe act of working with other producers in an effort to limit competition and increase joint profits
 cartela group of firms that gets together and makes joint price and output decisions to maximize joint profits
 tacit collusioncollusion occurs when price and quantity fixing agreements among producers are explicit;  tacit collusion occurs when such agreements are implicit
 price leadershipa form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy
 kinked demand curve modela model of oligopoly in which the demand curve facing each individual firm has a "kink" in it;  the kink results from the assumption that competitor firms will follow if a single firm cuts price but will not follow if a single firm raises price
 cournot modela model of a two-firm industry (duopoly) in which a series of output adjustment decisions leads to a final level of output between the output that would prevail if the market were organized competitively and the output that would be set by a monopoly
 perfectly contestable marketa market in which entry and exit are costless
 dominant strategyin game theory, a strategy that is best no matter what the opposition does
 prisoners' dilemmaa game in which the players are prevented from cooperating and in which each has a dominant strategy that leaves them both worse off than if they could cooperate
 maximin strategyin game theory, a strategy chosen to maximize the minimum gain that can be earned
basically, players choose the strategy that has the most attractive "worst case" scenario
 nash equilibriumin game theory, the result of all players' playing their best strategy given what their competitors are doing
 tit-for-tat strategya company's strategy that lets a competitor know the company will follow the competitor's lead, a player in one round simply mimics the player's behavior in the previous round--it's the optimal strategy for getting the other player to cooperate
 federal trade commission (FTC)a federal regulatory group created by congress in 1914 to investigate the sturcture and behavior of firms engaging in the interstate commerce, to determine what constitutes unlawful "unfair" behavior, and to issue cease-and-desist orders to those found in violation of antitrust law
 antitrust division (of the Department of Justice)it also empowered to act against violators of antitrust laws; it initiates action against those who violate antitrust laws and decides which cases to prosecute and against whom to bring criminal charges (FTC cannot bring criminal charges)
 price-fixingwhen competitors get together and decide to raise the prices (cartels)
 tying contractsmaking a customer by something from someone else in order to be allowed to buy from you
 exclusive dealingnot letting your customers buy from a competitor
 interlocking directorateswhen someone serves on the board for 2 competing firms
 consent decreesformal agreements on remedies among all the parties to an antitrust case that must be approved by the courts; consent decrees can be signed before, during or after a trial
 Herfindahl-Hirschman Index (HHI)a mathematical calculation that uses market share figures to determine whether or not a proposed merger will be challenged by the government
 concentrated (HHI)challenge if index is raised more than 50 points by the merger 
anything above 1,800
 moderate concentration (HHI)challenge if index is raised by more than 100 points by the merger
anything between 1,000 and 1,800
 unconcentrated (HHI)no challenge
anything below 1,000
 trustan arrangement in which shareholders of independent firms agree to give up thier stock in exchange for trust certificates that entitle them to a share of the trust's common profits; a group of trustees then operates the trust as a monopoly controlling output and setting price
 interstate commerce commission (ICC)a federal regulatory group created by Congress in 1887 to oversee and correct abuses in the railroad industry
 sherman actpassed by Congress in 1890, the act declared every contract or conspiracy to restrain trade among states or nations illegal and declared any attempt at monopoly, successful or not, a misdemeanor
 rule of reason the criterion introduced by the Supreme Court in 1911 to determine whether a particular action was illegal ("unreasonable") or legal ("reasonable") within the terms of the Sherman Act.  Under this rule, "mere size was not an offense" and behavior was the key
 clayton actpassed by Congress in 1914 to strengthen the Sherman act and clarify the rule of reason, the act outlawed specific monopolistic behaviors such as tying contracts, price discrimination, and unlimited mergers
 wheeler-lea actextended the language of the federal trade commission act to include "deceptive" as well as "unfair' methods of competition
 per se rulea rule enunciated by the courts declaring a particular action or outcome to be a per se (intrinsic) violation of antitrust law, whether the rationale are reasonable or not.
 pure monopoly-one firm controls the market
-block entry
 dominant firm-one firm: more than half market share
-no close rival

 tight oligopoly-top 4 firms:  more than 60% of market output
-evidence of coppperation
 effective competition-low concentration
-low barriers to entry
-little or now collusion
 insourcingmaking your inputs yourself
 outsourcingbuying inputs from elsewhere
 vertical integration"insourcing" expansion into earlier / later stages of production

 bounded rationalityits hard for a manager to keep track of all the stages (typical in vertical integration)
 market failureoccurs when resources are misallocated, or allocated inefficiently; the result is waste or lost value
 sources of market failure1. imperfect market structure, or noncompetitive behavior
2. imperfect information
3. the existence of public goods
4. the presence of external costs and benifits
 imperfect informationthe absence of full knowledge concerning product characteristics, available prices, and so forth
 adverse selectioncan occur when a buyer or seller enters into an exchange with another party who has more information; this can also be seen as "hidden characteristics" problem
 signalingis an attempt by the informed side to communicate valuable information that is otherwise hidden
 screeningis just the employer looking for these signals
 moral hazardarises when one party to a contract alters their behavior in a costly manner because the cost of that behavior has been passed on to the other party to the contract
 the winner's curseif the item you win turns out not to be worth as much as you think it is, then the "winner" of the auction is really a "loser"
 behavioral economicspsychology + econ
-people are not robots and may make mistakes
-don't always maximize utility 
 unbounded willpowereven if we know what's "best" for us, we are often too lazy to do it
 public goods (social or collective goods)goods that are nonrival in consumption and/or their benefits are nonexchangeable or (nonexclusive)
 nonrival in consumptionone person's enjoyment of the benefits of a public good does not interfere with another's consumption of it
 nonexlusive (or nonexcludable):once a good is produced, no one can be exuded from enjoying its benifits
 private goods-rival in consumption
-exclusive
-provided by private sector
 public goods-nonrival in consumption
-nonexclusive
-provided by government

 natural monopoly ("quasi-private" goods)-nonrival but exclusive
-with congestion these can turn into private goods
-provided by private sector or government
 open-access good (aka open resource or common resource good)-rival but nonexclusive
-regulated by government
 free-rider problema problem intrinsic to public goods;  because people can enjoy the benifits of public goods whether they pay for them or not, they are usually unwilling to pay for them
 drop-in-the-bucket problema problem intrinsic to public goods;  the good or service is usually so costly that its provision generally does not depend on whether or not any single person pays
 optimal level of provision for public goodsthe level at which resources are drawn from the production of other goods and services only to the extent that people want the public goods are willing to pay for it
 tieabout hypothesisan efficient mix of public goods is produced when local land / housing prices and taxes come to reflect consumer preferences just as they do in the market for private goods
 externalitya cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction; sometimes called spillovers, third-party effects, or neighborhood effects
 marginal private cost (MPC)the cost of consumption or production paid by the consumer or firm
 marginal damage cost (MDC)the additional harm done by increasing the level of an externality-producing activity (consumption or production) by one unit
 marginal social cost (MSC)the total cost to society of producing an additional unit of a good or service:
MSC = MPC +MDC
 coase theoremas long as property rights are clearly stated and bargaining costs are minimal, private parties can arrive at the efficient solution regardless of how property is assigned
 injunctiona court order forbidding the continuation of behavior that leads to damages
 liability ruleslaws that require A to compensate B for damages imposed
 lorenz curve a widely used graph of the distribution of income, with cumulative percentage of families plotted along the horizontal axis and cumulative percentage of income plotted along the vertical axis
 gini coefficienta commonly used measure of inequality of income derived from a Lorenz curve, it can range from 0 to a maximum of 1 and is measured as the area of the region between the Lorenz curve and the 45 degree line divided by the max possible area
 poverty linethe officially established income level that distinguishes the poor from the non poor; it is set at "money income" equal to three times the cost of the Department of Agriculture's minimum food budget
 human capitalthe stock of knowledge, skills, and talents that people possess; it can be inborn or acquired through education and training
this explains the income inequality in the "middle of the distribution
 compensating differentialsdifferences in wages that result from differences in working conditions; risky jobs usually pay higher wages; highly desirable jobs usually pay lower wages.
 property incomeincome from the ownership of real property and financial holdings; it takes the form of profits, interest, dividends, and rents
 transfer paymentspayments by the government to people who do not supply goods or services in exchange
 utilitarian justicethe idea that "a dollar in the hand of a rich person is worth less than a dollar in the hand of a poor person"
 Rawlsian justicea theory of distributional justice that concludes that the social contract emerging from the "original position" would call for an income distribution that would maximize the well-being of the worst-off member of society.  inequality is acceptable but only if the process that causes it also improves the lot of the poor 
 veil of ignoranceassume we enter this world not knowing what our social situation will be (rich, poor, ect).  Choosing a system that maximizes the well-being of the worst-off member (which could be you!) is the safest thing to do.
 labor theory of valuestated most simply, the theory that the value of a commodity depends only on the amount of labor required to produce it
 social insurancewhere payments from the system are related to payments into the system
 income assistancewhere payments are based solely need
 social security systemsocial insurance program that includes three separate programs that are financed through separate trust funds
OASI :  Old age and Survivors Insurance
DI :  Disability Insurance
HI :  Health insurance or medicare
 medicareis an in-kind government transfer programs that provide health and hospitalization benefits to the aged and their survivors and to certain of the disabled, regardless of income
 unemployment compensationa state government transfer program that pays cash benefits for a certain period of time to laid-off workers who have worked for a specified period of time for a covered employer
 public assistance, or welfaregovernment transfer programs that provide cash benefits to 
1. families with dependent children whose income and assets fall below a very low level, and
2. the very poor regardless of whether or not they have children
 medicaidin-kind government transfer programs that provide health and hospitalization benefits to people with low incomes  (like Medicare for the poor)
 food stampsvouchers that have a face value greater than their cost and that can be used to purchase food at grocery stores, only low-income families and individuals are eligible 
 housing programs"section 8" subsidized housing, housing projects
 the earned income tax creditlow income families can actually receive money from the government rather than paying taxes
 ability to pay principlethose who have more should pay more (progressive tax)
 benefits-received principlethose who benefit more from the tax should pay more
 tax basewhat is being taxed
 tax structurehow it is being taxed
 tax revenuethe amount of money collected by the government from the tax
 proportional taxa tax whose burden is the same proportion of income for all households (aka flat tax)
 progressive taxa tax whose burden, expressed as a percentage of income, increases as income increases
 regressive taxa tax whose burden, expressed as a percentage of income, falls as income increases
 principle of second bestthe fact that a tax distorts an economic decision does not always imply that such a tax imposes an excess burden; if there are previously existing distortions (such as an externality or other tax), such a tax may actually improve efficiency
 productivity of an inputthe amount of output produced per unit of that input
 marginal product of laborthe additional output produced by one additional unit of labor
 marginal revenue productthe additional revenue a firm earns by employing one additional unit of input, ceteris parabius
 marginal resource costthe change in total cost when an additional unit of a resource is hired, ceteris paribus
 factor substitution effectthe tendency of firms to substitute away from a factor whose price has risen and toward a factor whose price has fallen
 output effect of a factor price increase (decrease)when a firm decreases (increases) its output in response to a factor price increase (decrease), this decreases (increases) its demand for all factors
 labor supply curvea diagram that shows the quantity of labor supplied at different wage rates, its shape depends on how households react to changes in the wage rate
 substitution effect dominatesthe cost of leisure rises and we substitute from leisure into labor
 income effect dominateswe demand more leisure as our income rises
 absolute advantagethe advantage in the production of a product enjoyed by one country of a product enjoyed by one country over another when it uses fewer resources to produce that product than the other country does
 comparative advantagethe advantage in the production of a product enjoyed by one country over another when that product can be produced at lower cost in terms of other goods than it could be in the other country
 law of comparative advantagestates that the country that has the lower opportunity cost of producing a good should specialize in the production of that good
 terms of tradethe ratio at which a country can trade domestic products for imported products; or how much of one good can be exchanged for one unit of another good
 theory of ocmparative advantageRicardo's theory that specialization and free trade will benefit all trading partners; real wages (what people will buy with their money) will rise
 Heckscher-Ohlin theorema theory that explains the existence of a country's comparative advantages by its factor endowments:  a country has a comparative advantage in the production of a product if that country is relatively well endowed with inputs used intensively in the production of that product
 exchange ratethe ratio at which two currencies are traded; the price of one currency in terms of another
 trade surplusthe situation when a country exports more than it imports
 trade deficitthe situation when a country imports more than it exports
 import quotaa limit set by the government on the quantity of a good that can be legally imported into the country
is effective if it is set below the equilibrium quantity of imports
 tariffa tax placed on an imported good; they hurt imports
 dumpinga firm or industry's sale of products on the world market at prices below the cost of production
 Smoot-Hawley tarriffthe U.S. tariff law of the 1930s, which set the highest tariffs in U.S. history (60 percent); it set off an international trade ware and caused the decline in trade that is often considered a cause of the worldwide depression of the 1930s
 General Agreement on Tariffs and Trade (GATT)an international agreement signed by the U.S. and 22 other countries in 1947 to promote the liberalization of foreign trade this was the precursor to the World Trade Organization which was founded in 1995
 U.S.-Canadian Free Trade Agreementan agreement in which the U.S. and Canada agreed to eliminate all barriers to trade between the tow countries by 1998 (signed in 1988)
 North American Free Trade Agreement (NAFTA)an agreement signed by the U.S., Mexico, and Canada in which the tree countries agreed to establish all North America as a free-trade zone
 economic integrationoccurs when two or ore nations join to form a free-trade zone
 European Union (EU)the European trading boc composed of 27 European nations, 16 of these nations share a common currency called the Euro
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