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Price-searcher

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firms produce products that differ and therefore they can alter price (pricing power or monopoly power). Most real world firms are price searchers.

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Price takers

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takers produce identical products (for example, wheat, corn, soybeans) and because the firms are small relative to the market (many competitors) each must take the price established in the market. "Perfect competition"

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Barriers to Entry

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large capital investment, government licensing

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Monopoly

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one seller in the market

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Oligopoly

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a few large sellers dominate the market

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money interest rate

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reflects three components:

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Risk Premium:

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reflects probability of default large when the probability of borrower default is substantial

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Inflationary Premium:

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reflects expectations that the loan will be paid back with dollars of less purchasing power

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Pure rate of interest:

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reward for use of your money Normally 2-3% range

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present value

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The rate, and, how far in the future the payment will be received.

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Market Failures

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Can be demand-side failures, where the market does not accurately reflect the true demand for the product. Or supply-side failures, where the market produces too much of an undesirable product

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Externalities

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exist when the market fails to register fully costs and benefits (impact on third-parties).

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Types of Economic Goods

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Excludable Non-Excludable Rival Non-Rival

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non-rival

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Individuals can simultaneously enjoy consumption of the same product or service. Many can receive full benefit of product

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non-excludable

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It is not possible or feasible to restrict consumption of the good to only those who pay for it.

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Rational Ignorance Effect

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Recognizing their vote is unlikely to be decisive, most voters have little incentive to obtain information on issues and alternative candidates.

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special interest

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issue generates large personal benefit for a small number of constituents while imposing a small individual cost on a large number of others

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Rent-Seeking

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are actions by individuals, groups, and corporations to use the political process to take wealth from the public... trying to get undeserved handouts, privileges, subsidies, etc., from the Government

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Tariffs

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are taxes levied on imports that effectively raise the cost of imported products relative to domestic products

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absolute advantage

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in the production of a product when it is more efficient than any other country in producing it

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comparative advantage

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suggests that countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries, even if this means buying goods from other countries that they could produce more efficiently at home

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The fact that some people will work hard to earn a lot of money while others will be content with much less income indicates that

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Correct worker preferences are an important source of earning differentials.

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The earnings of all employees in a competitive economy would be equal if

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all individuals were homogeneous. all jobs were equally attractive. workers were perfectly mobile among jobs.

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When employment discrimination results from the personal prejudices of employers, economic theory suggests that

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an employer who discriminates will experience higher costs

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Which of the following is most likely to reduce the market wage in a job category?

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The job is prestigious, and the work is quite interesting.

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Economic theory suggests that the standard of living of American workers would rise if

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Economic theory suggests that the standard of living of American workers would rise if

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If all persons had identical preferences and productivity factors (ability, skill level, education, experience, etc.), the highest paying jobs would be the most

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undesirable

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If the interest rate were 10 percent, the net present value of $100 to be received one year from now would be

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90.91

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You are considering the purchase of a business that is currently earning $25,000 per year in after-tax profit. If these conditions are expected to continue year after year into the future, and the interest rate is currently 10 percent, the current market value of this business is

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250,000

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The net present value of $1,000 received in the future would

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decrease if the interest rate rose.

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The money (or nominal) rate of interest is the

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real rate of interest plus the inflationary premium

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Which of the following is true of saving and investment?

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If investment is going to be undertaken, someone must save.

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A competitive capital market is important to society because it directs resources toward projects that

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create wealth

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In 2009, high-income families (the top 20 percent) in the United States earned approximately ____ percent of the total before-tax income.

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48

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Which of the following is true?

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In a market economy, the link between productivity and income provides individuals with an incentive to provide resources that are highly valued by others.

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When a person who receives welfare benefits earns income, those benefits are reduced as earned income rises. This is referred to as

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an implicit marginal tax.

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Compared to low-income families, a larger proportion of high-income families

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is headed by a person with a college degree. has both a husband and a wife who work full time. is headed by a person between the ages of 35 and 64

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Which of the following best explains why so many persons with incomes below the poverty threshold income level work very little or not at all?

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They confront high implicit marginal tax rates.

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If complete equality of income were legislated, which of the following would economics predict?

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The incentive to produce and perform efficiently would be virtually eliminated.

Econ 1201 – Flashcard

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