question

Absolute Advantage

answer

One person has an absolute advantage over another if he or she takes fewer hours to perform a task than another person

question

Accounting Profit

answer

The difference between a firm's total revenue and its explicit costs

question

Adverse Selection

answer

The pattern in which insurance tends to be purchased disproportionately by those who are most costly for companies to ensure

question

Allocative Function of Price

answer

Changes in prices direct resources away from overcrowded markets and toward markets that are underserved

question

Asymmetric Information

answer

Situations in which buyers and sellers and not equally well informed about the characteristics of good and services for sale in the marketplace

question

Attainable Point

answer

Any combination of goods that can be produced using currently available resources

question

Average Benefit

answer

Total benefit of undertaking n units of an activity divided by n

question

Average Cost

answer

Total cost of undertaking n units of an activity divided by n

question

Average Total Cost (ATC)

answer

Total cost divided by total output

question

Average Variable Cost (AVC)

answer

Variable cost divided by total output

question

Barrier to Entry

answer

Any force that prevents firms form entering a new market

question

Basic Elements of a Game

answer

The players, the strategies available to each player, and the payoffs each player recieves for each possible combination of strategies

question

Better-than-Fair Gamble

answer

A gamble whose expected value is positive

question

Buyer's Reservation Price

answer

The largest dollar amound of the buyer would be willing to pay for a good

question

Buyer's Surplus

answer

The difference between the buyer's reservation price and the price he or she actually pays

question

Cartel

answer

A coalition of firms that agree to restrict output for the purpose of earning an economic profit

question

Cash on the Table

answer

Economic metaphor for unexploited gain from exchange

question

Change in Demand

answer

A shift of the entire demand curve

question

Change in Supply

answer

A shift of the entire supply curve

question

Change in the Quantity Demanded

answer

A movement along the demand curve that occurs in response to a change in price

question

Change in the Quantity Supplied

answer

A movement along the supply curve that occurs in response to a change in price

question

Coase Theorem

answer

If at no cost people can negotiate the purchase and sale of the right to perform activities that cuase externalities, they can always arrive at efficeint solutions to the problems caused by externalities

question

Collective Good

answer

A good or service that, to at least some degree, is nonrival but excludable

question

Commitment Device

answer

A way of changing incentives so as to make otherwise empty threats or promises credible

question

Commitment Problem

answer

A situation in which people connot achieve their goals because of an inability to make credible threats or promises

question

Comparitive Advantage

answer

One person has a comparitave advantage over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost

question

Compensating Wage Differential

answer

A difference in the wage rate - negative or positive - that reflects the attractiveness of a job's working conditions

question

Complements

answer

Two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift)

question

Constant (or parameter)

answer

A quantity that is fixed in value

question

Constant Returns to Scale

answer

A production process is said to have constant returns to scale if, when all inputs are changed by a given proportion, output changes by the same proportion

question

Consumer Surplus

answer

The economic surplus gained by the buyers of a product as measured by the cumulative difference between their respective reservation prices and the price they actually paid

question

Cost-plus Regulation

answer

A method of regulation under which the regulated firm is permitted to charge a price equal to its explicit costs of production plus a markup to cover the opporunity cost of resources provided by the firm's owners

question

Costly-to-Fake Principle

answer

To communicate information credibly to a potential rival, a signal must be costly or difficult to fake

question

Credible Promise

answer

A promise to take an action that is in the prmiser's interest to keep

question

Credible Threat

answer

A threat to take an action that is in the threatener's interest to carry out

question

Cross-Price Elasticity of Demand

answer

The percentage by which the quantity demanded of the first good changes in response to a 1% change in the price of the second

question

Crowding Out

answer

Government borrowing that leads private firms to cancel planned investment projects because of higher interest rates

question

Customer Discrimination

answer

The willingness of consumers to pay more for a product by members of a favored group, even if the quality of a product is unaffected

question

Deadweight Loss

answer

The deadweight loss caused by a policy is the reduction in economic surplus that results from adoption of that policy

question

Decision Tree (or Game Tree)

answer

A diagram that describes the possible moves in a game in sequence and lists the payoffs that correspond to each possible combination of moves

question

Demand Curve

answer

A schedule or graph showing the quantity of a good that buyers with to buy at each price

question

Dependent Variable

answer

A variable in an equation whose value is determined by the value taken by another variable in the equation

question

Disappearing Political Discourse

answer

The theory that people who support a position may remain silent because speaking out would create a risk of being misunderstood

question

Dominant Strategy

answer

One that yields a higher payoff no matter what the other players in a game choose

question

Dominated Strategy

answer

Any other strategy available to a player who has a dominated strategy

question

Earned-Income Tax Credit (EITC)

answer

A policy under which low income workers recieve credits on their federal income tax

question

Economic Loss

answer

An economic profit that is less than zero

question

Economic Profit

answer

The difference between a firm's total revenue and the sum of its explicit and implicit costs; also called excess profits

question

Economic Rent

answer

That part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor

question

Economic Surplus

answer

The economic surplus from takin gany action is the benefit of taking the action minus its cost

question

Economics

answer

The study of how people make choices under conditions of scarcity and of the results of those choices for society

question

Efficiency

answer

Condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels

question

Effiecient (Pareto-Efficient)

answer

A situation is efficient if no change is possible that will help some people without helping others

question

Efficient Markets Hypothesis

answer

The theory that the current price of stock in a corporation reflects all relevant information about its current and future earnings prospects

question

Efficient Point

answer

Any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the order

question

Elastic

answer

The demand for a good is elastic with respect to price if its price elasticity of demand is greater than 1

question

Employer Discrimination

answer

An arbitrary preference by an employer for one group of workers over another

question

Equation

answer

A mathematical expression that describes the relationship between two or more variables

question

Equilibrium

answer

A balanced or unchanging situation in which all forces at work within a system are cancelled by others

question

Equilibrium Price and Equilibrium Quantity

answer

The price and quantity of a good at the intersection of the supply and demand curves for the good

question

Excess Demand (Shortage)

answer

The difference between the quantity supplied and the quantity demanded when the price of a good lies below the equilibrium price; buyers are dissatisfied when there is excess demand

question

Excess Supply (Surplus)

answer

The difference between the quantity supplied and the quantity demanded when the price of a good exceeds the equilibrium price; sellers are dissatisfied when there is excess supply

question

Expected Value of a Gamble

answer

The sum of the possible outcomes of the gamble multiplied by their respective probabilities

question

Explicit Costs

answer

The actual payments a firm makes to its factors of production and other suppliers

question

External Benefit (Positive Externality)

answer

A benefit of an activity received by people other than those who pursue the activity

question

External Cost (Negative Externality)

answer

A cost of an activity that falls on people other than those who pursue the activity

question

Externality

answer

An external cost or benefit of an activity

question

Factor of Production

answer

An input used in the production of a good or service

question

Fair Gamble

answer

A gamble whos expected value is zero

question

First-Dollar Insurance Coverage

answer

Insurance that pays all expenses generated by the insured activity

question

Fixed Cost

answer

A cost that does not vary with the level of an activity; the sum of all payments made to the firm's fixed factors of production

question

Fixed Factor of Production

answer

An input whose quantity cannot be altered in the short run

question

Free-Rider Problem

answer

An incentive problem i nwhich too little of a good or service is produced because nonpayers cannot be excluded from using it

question

Head Tax

answer

A tax that collects the same amount from every taxpayer

question

Health Maintenance Organization (HMO)

answer

A group of physicians that provides health services to individuals and families for a fixed annual fee

question

Human Capital

answer

An amalgam of factors such as education, training, experience, intelligence, energy, work habits, trustworthiness, initiative, and others that affect the value of a worker's marginal product

question

Human Capital Theory

answer

A theory of pay determination that says a worker's wage will be proportional to his or her stock of human capital

question

Hurdle Method of Price Discrimination

answer

The practice by which a seller offers a discount to all buyers who overcome some obstacle

question

Imperfectly Competitive Firm

answer

A firm that has at least some control over the market of its product

question

Implicit Costs

answer

The opportunity costs of the resources supplied by the firm's owners

question

Income Effect

answer

The change in teh quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power

question

Income Elasticity of Demand

answer

The percentage by which a good's quantity demanded changes in response to a 1 percent change in income

question

Increasing Returns to Scale

answer

A production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by more than that proportion; also called economies of scale

question

Independent Variable

answer

A variable in an equation whose value determines the value taken by another variable in the equation

question

Inefficient Point

answer

Any combination of goods for which currently available resources enable an increase in the production of the other

question

Inelastic

answer

The demand for a good is inelastic with respect to price if its price elasticity of demand is less than one

question

Inferior Good

answer

A good whose demand curve shifts leftward when the incomes of buyers increase

question

In-Kind Transfer

answer

A payment made not in the form of cash but in the form of a good or service

question

Invisible Hand Theory

answer

Adam Smith's theory stating that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources

question

Labor Union

answer

A group of workers who bargain collectively with employers for better wages and working conditions

question

Law of Demand

answer

People do less of what they want to do as the cost of doing it rises

question

Law of Diminishing Marginal Utility

answer

The tendency for the additional utility gained from consuming an additional unit of a good to diminsih as consumption increases beyond some point

question

Law of Diminishing Returns

answer

A property of the relationship between the amount of a good or service produced and the amount of a variable factor required to produce it; the law says that when some factors of production are fixed, increased production of the good eventually requires ever larger increases in the variable factor

question

Lemons Model

answer

George Akerlof's explanation of how asymmetric information tends to reduce the average quality of goods offered for sale

question

Logrolling

answer

The practice whereby legislators support one another's legislative proposals

question

Long Run

answer

A period of time of sufficient length that all the firm's factors of production are variable

question

Macroeconomics

answer

The study of the performance of national economies and the policies that governments use to try to improve that performance

question

Marginal Benefit

answer

The marginal benefit of an activity is the increase in total benefit that results from carrying out one additional unit of activity

question

Marginal Cost

answer

The marginal cost of an activity is the increase in total cost that results from carrying out one additional unit of the activity; as output changes from one level to another, the change in total cost divided by the corresponding change in output

question

Marginal Product of Labor (MP)

answer

The additional output a firm gets by employing one additional unit of labor

question

Marginal Revenue

answer

The change in a firm's total revenue that results from a one-unit change in output

question

Marginal Utility

answer

The additonal utility gained from consuming an additional unit of a good

question

Market

answer

The market for any good consists of all buyers and sellers of that good

question

Market Equilibrium

answer

Occurs when all buyers and sellers are satisfied with their respective quantities at the market price

question

Market Power

answer

A firm's ability to raise the price of a good without losing all it's sales

question

Means-tested

answer

A benefit program is means-tested if its benefit level declines as the recipient earns additional income

question

Microeconomics

answer

The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets

question

Monopolistic Competition

answer

Industry structure in which a large number of firms produce slightly differentiated products that are resonably close substitutes for one another

question

Moral Hazard

answer

The tendency of people to expend less effort protecting those goods that are insured against theft or damage

question

Nash Equilibrium

answer

Any combination of strategy choices in which each player's choice is his or her best choice, given the other players' choices

question

Natural Monopoly

answer

A monopoly that results from economies of scale (increasing returns to scale)

question

Negative Income Tax (NIT)

answer

A system under which the government would grant every citizen a cash payment each year, financed by an additional tax on earned income

question

Nominal Price

answer

Absolute price of a good in dollar terms

question

Nonexcludable Good

answer

A good that is difficult, or costly, to exclude nonpayers from consuming

question

Nonrival Good

answer

A good whose consumption by one person does not diminish its availability for others

question

Normal Good

answer

A good whose demand curve shifts rightward when the incomes of buyers increase

question

Normal Profit

answer

The opportunity cost of the resources supplied by the firm's owners; Normal Profit = Accounting Profit - Economic Profit

question

Normative Economic Principle

answer

One that says how people should behave

question

Oligopoly

answer

An industry structure in which a small number of large firms produce products that are either close or perfect substitutes

question

Opportunity Cost

answer

The opportunity cost of an activity is the value of what must be forgone to undertake the activity

question

Optimal Combination of Goods

answer

The affordable combination that yields the highest total utility

question

Outsourcing

answer

A term increasingly used to connote having services performed by low-wage workers overseas

question

Payoff Matrix

answer

A table that describes the payoffs in a game for each possible combination of strategies

question

Perfect Hurdle

answer

One that completely segregates buyers whose reservation prices lie above some threshold from others whose reservation prices lie below it, imposing no cost on those who jump the hurdle

question

Perfectly Competitive Market

answer

A market in which no indivudal supplier has significant influence on the market price of the product

question

Perfectly Discriminating Monopolist

answer

A firm that charges each buyer exactly his or her reservation price

question

Perfectly Elastic Demand

answer

The demand for a good is perfectly elastic with respect to price if its price elasticity of demand is infinite

question

Perfectly Elastic Supply Curve

answer

A supply curve whose elasticity with respect to price is infinite

question

Perfectly Inelastic Demand

answer

The demand for a good is perfectly inelastic with respect to price if its price elasticity of demand is zero

question

Perfectly Inelastic Supply Curve

answer

A supply curve whose elasticity with respect to price is zero

question

Personal Responsibility Act

answer

The 1996 federal law that transferred responsibility to welfare programs from the federal level to the state level and placed a five year lifetime limit on payment of AFDC benefits to any given recipient

question

Pork Barrel Spending

answer

A public expenditure that is larger than the total benefit it creates but that is favored by a legislator because his or her constituents benefit from the expenditure by more than their share of the resulting extra taxes

question

Positional Arms Control Agreement

answer

An agreement in which contestants attempt to limit mutually offsetting investments in performance enhancement

question

Positional Arms Race

answer

A series of mutually offsetting investments in performance enahncement that is stimulated by a positional externality

question

Positional Externality

answer

Occurs when an increase in one person's performance reduces the expected reward of another in situations in which reward depends on relative performance

question

Positive Economic Principle

answer

One that predicts how people will behave

question

Poverty Threshold

answer

The level of income below which the federal government qualifies a family as poor

question

Present Value of a Perpetual Annual Payment

answer

For an annual interest rate r, the present value (PV) of a perpetual annual payment (M) is the amount that would have to be deposited today at that interest rate to generate annual interest earnings of M: PV = M/r

question

Price Ceiling

answer

A maximum allowable price, specified by law

question

Price Discrimination

answer

The practice of charging different buyers different prices for essentially the same good or service

question

Price Elasticity of Demand

answer

The percentage change in the quantity demanded of a good or service that results form a one percent change in its price

question

Price Elasticity of Supply

answer

The percentage change in the quantity supplied that will occur in response to a one percent change in the price of a good or service

question

Price Setter

answer

A firm with at least some latitude to set its own price

question

Price Taker

answer

A firm that has no influence over the price at which it sells its product

question

Prisoner's Dilemma

answer

A game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy

question

Producer Surplus

answer

The economic surplus gained by the sellers of a product as measured by the cumulative difference between the price received and their respective reservation prices

question

Production Possibilities Curve

answer

A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good

question

Profit

answer

The toal revenue a firm receives from the sale of its product minus all costs - explicit and implicit - incurred in producing it

question

Profit-Maximizing Firm

answer

A firm whose primary goal is to maximize the difference between its total revenues and total costs

question

Profitable Firm

answer

A firm whose total revenue exceeds its total cost

question

Progressive Tax

answer

One in which the proportion of income paid in taxes rises as income taxes

question

Proportional Income Tax

answer

One under which all taxpayers pay the same proportion of their incomes in taxes

question

Public Good

answer

A good or service that , to at least some degree, is both nonrival and nonexcludable

question

Pure Commons Good

answer

One for which nonpayers cannot easily be excluded and for which each unit consumed by one person means one less unit available for others

question

Pure Monopoly

answer

The only supplier of a unique product with no close substitutes

question

Pure Private Good

answer

One for which nonpayers can easily be excluded and for which each unit consumed by one person means one less unit available for others

question

Pure Public Good

answer

A good or service that , to a high degree, is both nonrival and nonexcludable

question

Rational Person

answer

Someone with well-defined goals who tries to fulfill those goals the best he or she can

question

Rational Spending Rule

answer

Spending should be allocated across goods so that the marginal utility per dollar is the same for each good

question

Rationing Function of Price

answer

Changes in prices distribute scarce goods to those consumers who value them most highly

question

Real Price

answer

Dollar price of a good relative to the average dollar price of all other goods and services

question

Regressive Tax

answer

A tax under which the proportion of income paid in taxes declines as income rises

question

Rent-Seeking

answer

The socially unproductive efforts of people or firms to win a prize

question

Repeated Prisoner's Dilemma

answer

A standard prisoner's dilemma that confronts the same players repeatedly

question

Risk-Averse Person

answer

Someone who would refuse any fair gamble

question

Risk-Neutral Person

answer

Someone who would accept any gamble that is fair or better

question

Seller's Reservation Price

answer

The smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost

question

Seller's Surplus

answer

The difference between the price received by the seller and his or her reservation price

question

Short Run

answer

A period of time sufficiently short that at least some of the firm's factors of production are fixed

question

Slope

answer

In a straight oine, the ratio of the vertical distance the straight line travels between two points (rise) to the corresponding horizontal distance (run)

question

Socially Optimal Quantity

answer

The quantity of a good that results in the maximum possible economic surplus from producing and consuming the good

question

Statistical Discrimination

answer

The practice of makin gjudgments about the quality of people, goods, or services based on the characteristics of the groups to which they belong

question

Substitutes

answer

Two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other (or if a decrease causes a leftward shift)

question

Substitution Effect

answer

The change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of a good changes

question

Sunk Cost

answer

A cost that is beyond recovery at the moment a decision must be made

question

Supply curve

answer

A graph or schedule showing the quantity of a good that sellers wish to sell at each price

question

Time Value of Money

answer

The fact that a given dollar amount today is equivalent to a larger dollar amount today is equivalent to a larger dollar amount in the future because the money can be invested in an interest-bearing account in the meantime

question

Tit-for-Tat

answer

A strategy for the repeated prisoner's dilemma in which players cooperate on the first move, then mimic their partner's last move on each successive move

question

Total Cost

answer

The sum of all payments made to the firm's fixed variable factors of production

question

Total Expenditure = Total Revenue

answer

The dollar amount consumers spend on a product is equal to the dollar amount sellers recieve

question

Total Surplus

answer

The difference between the buyer's reservation price and the seller's reservation price

question

Tragedy of the Common

answer

The tendency for a resource that has no price to be used until its marginal benefit falls to zero

question

Unattainable Point

answer

Any combination of goods that cannot be produced using currently available resources

question

Unit Elastic

answer

The demand for a good is unit elastic with respect to pricce if its price elasticity of demand is equal to 1

question

Value of Marginal Product of Labor (VMP)

answer

The dollar value of the additional output a firm gets by emplying one additional unit of labor

question

Variable

answer

A quantity that is free to take a range of different values

question

Variable Cost

answer

A cost that varies with the level of an activity; the sum of all payments made to the firm's variable factors of production

question

Variable Factor of Production

answer

An Input whose quantity can be altered in the short run

question

Vertical Intercept

answer

In a straight line, the value taken by the dependent variable when the independent variable equals zero

question

Winner-take-All Labor Market

answer

One in which small differences take in human captial translate into large differences in pay

question

Workers' Compensation

answer

A government insurance system that provides benefits to workers who are injured on the job

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