question

labor resources

answer

the physical and mental efforts of an economy's people that are available to produce goods and services

question

capital resources

answer

All nonhuman ingredients of production. Capital resources can be divided into natural and man-made categories.

question

technology

answer

the know-how and the means and methods of production available within an economy

question

gross domestic product (GDP)

answer

The market value of all final goods and services produced within an economy during a specific time period. GDP ignores the issue of whether ownership of the resources used for the production is domestic or foreign.

question

production possibilities curve

answer

Graphical representation of the maximum quantities of two goods and/or services that an economy can produce when its resources are used in the most efficient way possible.

question

opportunity cost principle

answer

The true cost of producing an additional unit of a good or service is the value of other goods or services that must be given up to obtain it.

question

increasing opportunity cost

answer

As more of a particular goods or service is produced, the cost in terms of other goods or services given up grows. This gives the production possibilities curve its bow shape.

question

marginal social cost (MSC)

answer

the true cost (opportunity cost) borne by society when the production of a goods or service is increased by one unit

question

marginal social benefit (MSB)

answer

the true benefit to society of a one-unit increase in the production of a good or service

question

cost-benefit analysis

answer

A technique for determine the optimal level of an economic activity. In general, an activity should be expanded so long as the expansion leads to greater benefits than costs.

question

real GDP

answer

GDP in current dollars corrected for inflation. The correction requires divided each year's GDP in current dollars by that year's price index, in decimal form.

question

per capita real GDP

answer

real GDP divided by population

question

per capital GDP

answer

GDP in current dollars divided by population

question

pure market economy

answer

economic system based on private ownership and control of resources, known as private property rights, and coordination of resource-use decisions through markets

question

pure command economy

answer

economic system characterized by state ownership and/or control of resources and centralized resource-use decision making

question

mixed systems

answer

economies that combine elements of the pure market and pure command economies

question

transitional economy

answer

a nation which is in the process of replacing an economic system of command and control with one based on market principles

question

purely competitive market

answer

A market in which there are a large number of mobile buyers and sellers of a standardized product. Further, the price of the product is free to move up or down, and there are no obstacles preventing firms from entering or leaving the market.

question

purely monopolistic market

answer

A market in which there is only one seller of a product. The monopolist has substantial control over price and is often able to prevent potential sellers from entering the market.

question

imperfectly competitive markets

answer

markets that fall between the purely competitive and purely monopolistic extremes; they may exhibit characteristics of either of these extremes

question

demand

answer

The quantity of the product that consumers are willing to purchase at various prices, other things being equal. The other things that must remain equal are (1) the consumers' incomes, (2) the price of goods related in consumption, (3) the consumers' tastes, (4) the consumers' expectations, and (5) the number of consumers.

question

law of demand

answer

the lower the price of the goods, the larger will be the quantity demanded; and the higher the price, the smaller will be the quantity demanded, other things being equal

question

change in quantity demanded

answer

a movement along one demand curve, brought about by a change in the price of the product

question

change in demand

answer

a shift to an entirely new demand curve, brought about by a change in one or more of the factors assumed to be held constant

question

normal good

answer

a good whose demand increases as incomes rises and decreases as incomes fall

question

inferior good

answer

a good whose demand decreases as incomes rise and increases as incomes fall

question

substitute goods

answer

two goods for which an increase in the price of one leads to an increase in the demand for the other

question

complementary goods

answer

two goods for which an increase in the price of one leads to a fall in the demand for the other

question

supply

answer

The quantity of a product that sellers are willing to sell at various prices, other things being equal. The other things that must remain equal are (1) the cost of production, (2) the prices of goose related in production, (3) sellers' expectations, and (4) the number of sellers.

question

law of supply

answer

the higher the price of the product, the larger will be the quantity supplied; and the lower the price, the smilers will be the quantity supplied, other things being equal

question

change in the quantity supplied

answer

a movement along one supply curve, brought about by a change in the price of the product

question

change in supply

answer

a shift to an entirely new supply curve, brought about by a change in one or more of the factors assumed to be held constant

question

equilibrium price

answer

The price at which the sellers of a product wish to sell exactly the same amount as the consumers wish to buy. As such, the equilibrium price indicates when consumers feel that precisely the correct share of the economy's scare resources is devoted to producing the product.

question

equilibrium quantity purchased

answer

the quantity of the product that is actually exchanged at the equilibrium price

question

price ceiling

answer

maximum allowable price for a good or service, usually set by a government

question

price floor

answer

minimum allowable price for a good or service, typically set by a governmental unit or by a group of sellers

question

derived demand for labor

answer

the demand for labor is said to be dependent on, or derived from, the demand for the product being produced

question

marginal revenue product of labor

answer

the increase in revenue that accrues to the firm when an additional worker is hired; indicates the value of the worker to the firm

question

marginal product of labor

answer

the increase in output due to hiring an additional worker

question

marginal revenue

answer

the increase in revenue from selling an additional unit of the product

question

law of diminishing returns

answer

as additional units of a variable input are added to a given amount of a fixed input, the resulting increases in output eventually will decline

question

substitution effect

answer

the change in the hours of work that occurs in response to a wage change, other things being equal

question

income effect

answer

a measure of the change in the hours of work that occurs when there is a change in income, other things being equal

question

marginal private benefit (MPB)

answer

the benefit that accrues to the direct consumers of a good or service resulting from a one-unit increase in consumption as is reflected in the demand curve for the good or service

question

externality in consumption

answer

a change in satisfaction, which can be either positive or negative, for someone other than the direct consumer of an item

question

marginal private cost (MPC)

answer

the increase in total cost that producers incur when output is increased by one unit as is reflected in the supply curve for the good or service

question

externality in production

answer

the production of one good or service leading to cost changes, either positive or negative, in the production of other items

question

market failure

answer

occurs when markets, operating on their own, do not lead to a socially optimal allocation of resources

question

explicit costs

answer

the costs of production incurred by the producer to buy or hire the resources required to carry on business

question

implicit costs

answer

the costs of production incurred by the producer for the use of self-owned, self-employed resources required to carry on business

question

pollution rights market

answer

a market that exists when firms are allowed to buy and sell government-issued licenses granting the holder the right to create a certain amount of pollution

question

private goods and services

answer

any good or service that satisfies both the exclusivity and rivalry conditions and thus goes satisfaction only to the direct consumer

question

semiprivate goods and services

answer

any goods or service that fails to fully satisfy either the exclusivity or rivalry conditions and thus the primary benefit of consumption to the direct consumer, but also influences the satisfaction of others

question

public goods and services

answer

a good or service that fails to satisfy both the exclusivity and rivalry conditions and thus, if provided to one, yields benefits to all

question

free rider

answer

an individual who consumes benefits from a public good or service but who pays no part of its cost

question

equimarginal principle

answer

an efficient allocation of a budget exists when the last dollar spent on any one facet of the budget yields the same marginal social benefit as the last dollar spent on any other facet

question

psychic income

answer

benefits an individuals receives from a business endeavor int he form of personal satisfaction rather than in the form of money

question

psychic costs

answer

costs an individuals incurs in pursuing a business in the form of negative personal satisfaction rather than in the form of money

question

discrimination

answer

the term means that the equals are treated unequally or unequals are treated equally

question

concentration ratio

answer

the percentage of industry sales accounted for by the larges four (or eight) largest firms in an industry; a measure of monopoly power

question

marginal revenue (MR)

answer

the increase in revenue accruing to the firm from selling an additional unit of its product

question

profits

answer

the difference between total revenue and total cost; maximized by producing the output at which marginal revenue equals marginal cost

question

deadweight welfare loss due to monopoly

answer

the reduction in social welfare due to the exercise of monopoly power

question

barriers to entry

answer

impediments to the entry of new firms into a market, such as product differentiation and government licensing, usually used by monopolists to protect their favored positions

question

network economies

answer

situation in which the value of a product to a consumers is enhanced when others also choose to consume the same product

question

average cost

answer

ratio of costs to the number of units being produced, sometimes called the per-unit cost

question

economies of scale

answer

situation that occurs when long-run average cost can be reduced simply by increasing the firm's size and producing more of the product

question

diseconomies of scale

answer

situation that occurs beyond a certain size and production level, when average cost rises as production is increased

question

natural monopoly

answer

an industry in which the average cost of production is minimized by having only one firm produce the product

question

capture theory of regulation

answer

the belief that regulatory agencies, regardless of their initial indentations, eventually come to serve the interest of the firms being regulated rather than the interests of the general public

question

corporations

answer

firms organized as legal entities separate from the owners, the stockholders, who, by law, have limited liability

question

stock options

answer

guarantees issued by a corporation which allow the holder to purchase a set number of shares at a fixed price, often called the strike price; stock options are frequently used as a form of managerial compensation

question

francise

answer

an exclusive right to produce and market specific commercial goods and services within a specified geographic territory

question

product market

answer

buyers and sellers engage in the exchange of final goods and services

question

resource market

answer

buyers and sellers engage in the exchange of the factors of production

question

cartel

answer

a group of firms that formally agree to coordinate their production and pricing decisions in a manner that maximizes joint profits

question

monopsony

answer

a market with only one buyer or employer

question

marginal cost of labor (MCL)

answer

the change that occurs in a firm's total labor costs due to hiring an additional worker, per unit of time

question

monopsonistic profit

answer

the difference between the workers' contribution to a monopsonistic firm's receipts and their wages

question

labor union

answer

a formal organization of workers that bargains on behalf of its members over the terms and conditions of employment

question

strike

answer

a work stoppage initiated by labor

question

lockout

answer

a work stoppage initiated by management

question

consumption possibilities curve

answer

graph of the maximum quantities of two goods and/or services that can be consumer in an economy when its resources are used efficiently

question

comparative advantage

answer

the ability of a country to produce a good at a lower opportunity cost of producing the good than any other country

question

comparative disadvantage

answer

the inability of a country to produce a good except at a higher opportunity cost of producing the good than another country

question

exchange rate

answer

the price of one country's currency in terms of the monetary units of another country

question

tariff

answer

a tax placed on internationally traded goods, usually imports

question

quota

answer

a regulation that limits by law the quantity of specific foreign goods or services that may be imported during a period of time

question

voluntary restraint agreement

answer

an international treaty whereby one nation "volunteers" to restrict its exports of a product that it sells to another nation

question

embargo

answer

government provision formally preventing one nation from trading goods and services with another nation or group of nations, intended to eliminated international trade between the countries in question

question

pegging

answer

occurs when one nation imposes a fixed exchange rate for its currency in terms of another nation's currency

question

dumping

answer

an international trade practice in which a producer is selling abroad at a price below cost or below its domestic price

question

customs union

answer

a free trade alliance of nations that share common external tariffs

question

euro

answer

the cross-national currency of 16 European Union countries

question

free trade area

answer

an alliance of nations without trade barriers between its members

question

economic growth

answer

a long-run prices that results from a compounding of economic events over time

question

business cycle

answer

An erratic short-run fluctuation in economic activity around the economy's long-run growth growth trend. Every business cycle has four distinct phases: expansion, peak, contraction, and trough.

question

productivity

answer

The average amount of output that can be produced with a given set of inputs. It can be calculated as the ratio of output to input.

question

average product of labor

answer

The total output of labor divided by the total number of labor units used in production. The average product of labor is a measure of labor productivity.

question

commercial bank

answer

a for-profit business that accepts deposits from savers and makes loans to borrowers

question

financial intermediary

answer

an institution that brings together savers and borrowers

question

investment bank

answer

a bank which specializes in selling new issues of stocks and bonds for existing corporations

question

stock

answer

a financial asset that represents a share of ownership in the issuing corporation

question

bond

answer

A financial asset that represents a loan which will be paid back over time with interest. A bond is a debt obligation of the issuer.

question

dividends

answer

the distribution of profits from a cop oration to its stockholders

question

capital gain

answer

the profit earned by selling a financial asset at a price greater than the price paid to acquire it

question

primary financial market

answer

a market in which new financial assets such as stops and bonds are sold for the first time

question

secondary financial market

answer

a market in which existing financial assets such as stocks and bonds are brought and solder between current owners

question

liquidity

answer

the degree to which a financial asset can be converted into cash

question

insurance company

answer

a financial intermediary which sells policies that guarantee a minimum payment in the case of an unlikely future event

question

insurance premium

answer

payments made by customers to secure a policy written by an insurance company

question

medium of exchange

answer

the use of money for the payment of goods and services and for the payment of debt

question

measure of value

answer

the use of money to measure the value of goods and services

question

store of value

answer

the use of money as an asset to hold

question

M1

answer

currency and coings in circulation, nonbank traveler's checks, demand deposits, and other checkable accounts such as NOW accounts

question

M2

answer

M1 plus savings and time deposits of small denomination and money-market mutual funds

question

required reserve ratio

answer

the ratio of cash reserves to demand deposits that banks are required to maintain

question

money multiplier

answer

A numerical coefficient derived from the legal reserve ratio and equal to the reciprocal of the legal reserve ratio. The money multiplier multiplied by a change in excess cash reserves of banks gives the maximum change in the money supply.

question

open-market operations

answer

the purchases and sales of government securities by the Federal Reserve Open Market Committee in order to control the growth in the money supply

question

discount rate

answer

the rate of interest that the Federal Reserve Banks charge when banks borrow from the Fed

question

federal funds rate

answer

the interest rate that banks charge other banks to borrow reserves

question

subprime mortgage

answer

a loan granted to individuals with poor credit histories who do not qualify for a conventional mortgage

question

adjustable rate mortgage (ARM)

answer

a real estate loan whereby the interest rate changes over times based on prevailing market conditions

question

collateralized debt obligation (CDO)

answer

a security comprised of a bundle of collateralized mortgages or other debt from multiple sources

question

credit default swaps (CDS)

answer

an insurance contract against the default of an income-generating financial asset

question

warrant

answer

a financial security that allows the holder to purchase shares of stock in the issuing company at a fixed price

question

labor force

answer

all noninstitutionalized individuals 16 years of age and older who are employed for pay, actively seeking employment, or awaiting recall from a temporary layoff

question

labor force participation rate

answer

the percentage of the potential labor force population which actually belongs to the labor force

question

unemployment rate

answer

the percentage of the labor force that is unemployed

question

discouraged workers

answer

people not included in the official measures of unemployment because they have stopped actively searching for work and are no longer in the labor force

question

frictional unemployment

answer

brief periods of unemployment usually originating on the labor supply side of the market; it is transitional, often in the form of people change and searching for new jobs

question

structural unemployment

answer

unemployment that is caused by fundamental changes in demand for certain kinds of labor due to technological changes or changes in consumers' tastes and preferences

question

cyclical unemployment

answer

unemployment caused by a contraction in aggregate demand or total spending in the economy

question

full-employment unemployment rate

answer

the rate that reflects frictional and structural unemployment and is consistent with price stability

question

inflation

answer

a continuing rise in the general level of prices

question

equity effects of inflation

answer

the effects of inflation of the distribution of income

question

efficiency effects of inflation

answer

the effects of inflation on the pattern of resource allocation

question

output effects of inflation

answer

the effects of inflation on the level of production

question

hyperinflation

answer

severe and prolonged inflation that results in the value of money losing its acceptability as a medium of exchange

question

aggregate demand

answer

a schedule showing output demanded at different price levels

question

marginal propensity to consume

answer

the change in consumption divided by the change in income

question

marginal propensity to save

answer

the change in saving divided by the change in income

question

psychological law of consumption

answer

when income changes, consumption changes, but by less than the change in income

question

net exports

answer

the difference between total exports minus total imports

question

trade deficit

answer

occurs when the value of a nation's imports exceeds the value of the nation's exports

question

trade surplus

answer

occurs when the value of a nation's exports exceeds the value of the nation's imports

question

aggregate supply

answer

a schedule showing the quantity of output supplied in the economy at different price levels

question

demand-pull inflation

answer

increase in total consumer, investment, and government spending cause rightward shifts in the aggregate demand curve

question

leakages

answer

withdrawals from an economy's circular flow chick include savings, taxes, and imports

question

injections

answer

additions to an economy's circular flow which include investments, government spending, and exports

question

cost-push inflation

answer

increases in the costs of producing goods and services cause leftward shifts in the aggregate supply curve

question

Philips curve

answer

a graphical representation of the short-run relationship between an economy's unemployment and inflation rates

question

transfer payments

answer

government expediters in the form of money payments to people who have not contributed to the current production of goods and services

question

government purchases of goods and services

answer

expenditures for currently produced goods and services that are a part of the nation's income

question

equal tax treatment doctrine

answer

taxpayers in the same economic circumstances should be treated equally

question

horizontal equity

answer

people in identical economic circumstances pay an equal amount of taxes

question

vertical equity

answer

taxpayers in different economic circumstances are treated unequally based on either the ability to pay or the benefits received

question

relative tax treatment doctrine

answer

taxpayers in different economic circumstances should be treated unequally

question

ability-to-pay principle of taxation

answer

taxes should be distributed among taxpayers based on the ability to pay taxes

question

benefits-received principle of taxation

answer

taxes should be distributed among taxpayers based on the individual benefits received from government goods and services

question

excess tax burden

answer

a measure of tax inefficiency; it measures the non neutral or the distortionary effect of the tax on relative prices and resource allocation

question

forward tax shifting

answer

situation in which any part of a tax is paid for by consumers in the form of higher prices

question

backward tax shifting

answer

situation in which any part of the tax is paid for by the owners of resources in the form of lower resource prices

question

tax incidence

answer

the burden or the final resting place of the tax

question

price elasticity of demand

answer

the responsiveness of the quantity demanded of a product to changes in the product's price

question

perfect price elasticity of demand

answer

An increase in price results in a reduction in quality demanded to zero. This situation is usually shown as a horizontal demand curve at the current price.

question

perfect price inelasticity of demand

answer

An increase in price results in no change in the quantity demanded. This situation is usually shown as a vertical demand curve at the current quantity demanded.

question

private insurance

answer

a contract whereby individuals agree to make payments, often called premiums, to a company in return for a guarantee of financial benefits in the event that some undesired circumstance occurs

question

social insurance

answer

government programs, financed through tax revenues, that guarantee citizens financial benefits for events which are beyond an individual's control, such as old age, disability, and poor health

question

fully funded insurance scheme

answer

insurance program designed to provide benefits that are financed from the interest income earned on accumulated payments

question

pay-as-you-go insurance scheme

answer

insurance program designed to provide benefits that are financed from current payments

question

cost-of-living allowances (COLAs)

answer

the Social Security COLA is equal to the amount of inflation experienced within the economy during the previous year as measure by the Consumer Price Index (CPI)

question

retirement effect

answer

the incentive for workers to increase their saving behavior throughout their working lives because Social Security tends to increase the length of retirement

question

bequest effect

answer

an increase in saving among people who wish to leave assets to their children as compensation for the losses incurred due to the burden of Social Security taxes

question

wealth substitution effect

answer

the reduction in saving as workers substitute the wealth accumulated through participation in Social Security for other forms of private wealth

question

free-for-service system

answer

a system in which buyers pay the cost of what they receive

question

managed care system

answer

a health care system whereby payments to health care providers are based on a prearranged schedule of fixed fees that has been negotiated between the insurer and the providers

question

deductible

answer

the portion of a health services bill that is the responsibility of the patient, not the health insurer

question

co-insurance

answer

the percentage of the cost above the de-deductible that the patient is required to pay

question

prospective payment system

answer

a health care program whereby the prices of services are fixed in advanced by the insurer at a given amount for a given treatment

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