Microeconomics Test Questions

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Absolute advantage
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When one producer can produce more of all goods, for given levels of inputs, than other producers.
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Absolute price
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The price of a good in money terms; the monetary valuation of a good without reference to the general price level.
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Ad hoc
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Explaining only one event or being useful for only one occasion.
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Affirmative action
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Government policy giving preference to selected minority groups, particularly in hiring.
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Affirming the consequent
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The misconception of concluding that event A must be true because event B is true, from a theory that states that event A implied event B.
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AFL-CIO
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The resulting labor union from the merger of the old American Federation of Labor and the Congress of Industrial Organization.
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Age-earnings profile
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The relationship between an individual’s age and their earnings or income over their lifetime.
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Agency problem (principal-agent problem)
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The problem on party, the principal, faces, when he or she delegates tasks to another party, the agent. How does the principal create incentives for the agent to do what the principal wants, rather than what the agent wants?
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Aggregate demand (macroeconomics)
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The total amount of goods and services demanded by consumers, businesses, and the government in an economy.
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Aggregate demand (microeconomics)
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The sum of individual demand curves into a market demand curve.
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Allocative efficiency
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When the distribution of resources among competing ends leads to the exhaustion of mutual gains.
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Allocative inefficiency
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When the distribution of resources among competing ends leaves mutual benefits unclaimed.
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Alternative/opportunity cost
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The highest valued option which is foregone when an action or decision is undertaken.
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American Federation of Labor (AFL)
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A union of skilled laborers founded in 1881, now merged with the Congress of Industrial Organization (CIO).
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Annuity
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A contract to pay or receive a series of uniform payments occurring at regular intervals for a stated number of years.
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Antitrust legislation/statutes
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Laws or statutes which discourage monopoly and collusive practices and encouraged increased competition.
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Arc elasticity
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The percentage change in quantity divided by the percentage change in price calculated by using the midpoint of two points along a demand or supply curve of as the point of reference.
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Assertions
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The universal postulates of a theory.
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Asset
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An item owned by an individual, firm, or the government that generates income.
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Assistance in kind
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Support from the government in the form and goods and services rather than monetary outlays.
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Assumptions
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Simplifications made to make a theory more usable or easier to control.
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Asymmetry of information (Asymmetric information)
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When a party to a transaction has more a=or at least different information than the other party or any of the other parties involves. Usually, the case where the seller has more information than the buyer.
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At the margin
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Where the decision one makes concerns incremental units of a good.
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Athenian democracy
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A form of government where all citizens vote on all issues, as in ancient Athens.
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Average costs (AC)
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Total costs divided by the total quantity of output produces.
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Average cost curve (Average total cost curve)
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A “u” shaped curve (because of scale economics at low levels of output) which graphically represents the average level of costs at each level of output produced.
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Average fixed costs (AFC)
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Total fixed costs divided by total quantity output produces.
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Average fixed cost curve
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A declining or negatively sloped (asymptotic to he origin) curve which graphically represents the level of average fixed costs at each level of output produces. The curve is always a rectangular hyperbola.
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Average product (of an input) (AP)
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The total product of particular input divided by the quantity of the inputs used.
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Average rate of consumption
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Total consumption divided by the relevant duration of time.
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Average revenue (AR)
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Total revenue divided by the total quantity of output produces. This always equals the unit price of the good.
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Average total costs (ATC)
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Total costs divided by the total quantity of output produces. Equivalently, the sum of average fixed costs plus average variable costs.
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Average total cost curve (Average cost curve)
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A “u” shaped curve (because of scale economies at low levels of output) which graphically represents the level of average total costs at each level of output produced.
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Average variable costs
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Total variable costs divided by the total quantity of output produced.
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Average variable costs curve
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A “u” shaped curve which graphically represents the level of average variable costs for each level of output produces.
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Bad or economic bad
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An undesirable entity, something individuals would pay to have less of.
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Bankrupt
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When an individual, firm, or organization legally declares that they are unable to pay their debts.
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Barrier to entry
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Restrictions on the abilities of other firms to go into business in a monopolistic industry, where existing firms are earning positive profits. Examples range from patents, ti actions of governments or government agencies such as licensing arrangements, or huge start-up costs, where the underlying technology may result in a single firm being the least cost method of producing the good.
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Barter
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The direct exchange of goods and services for other goods and services without the use of money.
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Basing point pricing
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Establishes prices of delivered goods including an amount for transportation from a given production locale, whether or not the producer is located there.
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Bertrand duopoly
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A model in which two firms independently attempt to maximize their profits by simultaneously choosing prices.
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Bertrand paradox
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The unexpected result, that in equilibrium, marginal cost pricing and zero profitability characterize a Bertrand duopoly.
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Bilateral trade
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Exchange between two parties.
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Black market (underground economy)
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Exchanges of either illegal goods or those good in violation of government regulations such as tax laws and price controls.
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Block booking
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A tie-in-sale where movies are sold as a bundle without allowing the possibility of theaters to select only those they wish to show.
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Bonds
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Legal obligations of corporations and governments to pay periodic fixed sums for a specified number of years, plus the faces vale of the bond, the principal, at maturity.
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Corporate Average Fleet Equivalency (CAFE standards)
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Regulations which force car companies to produce cars so that the average miles per gallon for the fleet of cares produces by each company meets some government standard.
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Capital
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Any resource or produced good that produces income in the future.
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Capital gain
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The increase in the market value of an asset between the time at which the asset is bought and subsequently sold.
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Capitalism
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The economic system wherein the means of production, capital and land, are privately owned and operated in the pursuit of individual gain.
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Capitalized value
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The present value of an expected future income stream.
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Capital market
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Markets in which borrowing and lending take place. Households and firms and the government lend or supply their savings for claims to future profits or for interest to other individuals, forms or governments who borrow to increase present consumption or to finance the production of capital goods.
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Cartel
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A group of producers who agree to set price and output collectively so as to increase joint profits bu achieving a monopoly position in the market.
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Cash balances
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Money held by an individual.
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Centrally planned economies
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Economies in which resource allocations and production decisions are made by a central planner, the central government.
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Ceteris paribus
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All else being equal; holding all other variable fixed so as to investigate the effect of a change in one variable on one other variable.
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Change in demand
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A shift in the entire demand curve for a good. This occurs when anything other than the price of the good changes, such as income, the price of a substitute or complementary good, information about the good. The amount an individual is willing to purchase of a certain good change at each level of price.
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Change in quantity demanded
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The change in the amount of a good a consumer is willing to purchase caused by a change in the price of the good. This is a movement along the demand curve.
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Change in quantity supplied
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The change in the amount of a good a producer is willing to offer for sale prompted by a change in the price of the good. This is a movement along the supply curve.
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Change in supply
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A shift in the entire supply curve. This occurs when something other than the price of the good changes, such as new technology, weather, or natural disasters.
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Clayton Act of 1914
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Antitrust law that outlawed certain monopoly practices such as price discrimination, tying contracts and unlimited mergers, in addition to clarifying the “rule of reason”.
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Closed shop
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Where prior union membership in a condition of employment.
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Coase Theorem
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The proposition that in the absence of transaction costs, that is, with clearly delineated property rights, the assignment of liability to damages created by one individual will not prevent the exhaustion of mutual benefits, though the incomes of the parties involved will be affected.
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Collective bargaining
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The process by which union representatives and managers of a firm negotiate labor contracts, that is, conditions and terms of employment.
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Collusion
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The coordination in secret of producers to raise price and reduce output, that is, set a monopolistic price and quantity, in order to maximize joint profits; generally illegal.
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Confirmed
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Consistent with the theory. Not to be confused with proven.
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Command economies
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Economies wherein the government determines by fiat the allocation of resources and all production decisions, the quantity to be produced, the price charged, and the means of distribution.
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Commodity
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Any item which is bought and sold.
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Commodity money
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Any item that is used as a medium of exchange that also has an alternative non-monetary use. Example: gold
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Common law
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The unwritten law of a country based on custom, tradition, ad precedents of court rulings.
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Common property / public domain
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A resource for which there is no owner. No individual has the right to exclude any others from its use.
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Comparable worth
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The policy which requires jobs with similar characteristics to pay similar wages.
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Comparative advantage
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When a producer can produce a good with a lower opportunity cost of production than another.
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Competition
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The efforts of parties to secure rights to scarce goods.
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Competitive equilibrium
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The price and quantity determined by the intersection of the supply and demand curves for goods, where the quantity demanded equals quantity supplied.
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Competitive firm
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A firm which takes price as given and produces where its marginal cost equals that market price.
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Complementary goods (or inputs) / complements
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Goods, which are used jointly in production or consumed jointly, for example: a hammer and nails. Two goods are __ if a rise in the price of one good leads to a decrease in demand for the other, holding everything else constant.
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Compound interest
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Money paid or received for the use of money which based on the accumulated principal, that is, the original principal and the accumulated interest, not just on the original amount.
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Concentrated industry
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An industry with HH, a Herfindahl-Hirschman index, greater the 1800.
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Condercet’s paradox / voting paradox
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The possibility that a changing majority might always prefer a different outcome, no matter what choice is made.
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Congestion
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Crowding on a resource so that the actions of one person affects the costs or productivity of others using that resource.
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Congress of Industrial Organization (CIO)
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Founded in 1935, the first union organizing semi-skilled laborers in mass production industries.
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Constant returns to scale
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The property that when all factor inputs change in the same proportion, output changes in that exact same proportion.
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Constraints
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All things which impinge on behavior and are in principle capable of being measured, in contrast to preferences. In the theory of the consumer, prominent constraints are income, prices, time, technology, education, and laws.
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Consumer Price Index (CPI)
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The most widely used measure of the average price level in the economy. It is calculated using the cost of a market basket of goods consumed by households, reported every month by the Bureau of Labor Statistics.
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Consumer’s surplus
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The difference between what a consumer would be willing to pay for the units purchased, total value, and what the consumer actually pays, total expenditure. Graphically, the triangular area under the demand curve and above the market price.
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Consumption
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Spending by households on final goods.
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Contestable market
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A market with no significant barriers to entry by new firms.
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Cooperative
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An organization for the production of goods owned collectively by all members who share in the rents.
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Copyright
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The exclusive right to the publication or production of a form of literary of artistic work granted by law for the rest of one’s life plus 28 years (in the U.S.)
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Coporation
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A firm owned by stockholders whose liability is limited to the value of the assets of the firm. The private assets of the stockholders are beyond the reach of creditors.
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Correlation
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When a change in one variable is regularly associated with a change in another variable.
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Cost / Economic cost
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In economics, synonymous with alternative, or opportunity cost. The highest valued option which is foregone when an action or decision is undertaken.
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Cournot duopoly
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A model in which two firms independently attempt to maximize their profits by simultaneously choosing quantities.
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Craft union
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A labor union where only individuals involved in a certain same craft of trade belong.
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Credit market
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A market where funds are loaned to borrowers.
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Creditior
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An individual to whom another or others are indebted.
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Cross elasticity of demand
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A measure of the responsiveness in quantity demanded of one good to the change in price of another good. The percent change in the quantity demanded of one good divided by the percentage change in price of another good. It is positive for substitute goods and negative for complementary goods.
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Cross section data
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Observations on any number of economic units at a given point in time, in contrast with time series data.
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Currency
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Paper money and coins.
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Current price / current dollar terms
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The price consumers actually faced or the number of dollars actually paid in the designated year.
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Dead weight loss
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The lost mutual benefits from trade when output is reduced below its efficient level, that is, where price equals marginal cost.
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Debtor
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One who owes something to another or others.
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Decreasing average cost industry
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An industry where average total costs decrease as a firm’s output increases, so that the lowest average costs occur when the industry consists of only one firm.
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Decreasing returns to scale
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A production process where proportional increases in all factor inputs leads to an increase in output in a smaller proportion.
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Deflation
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A fall in the general level of prices.
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Demand curve
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A curve which graphically represents the quantity of a particular good a consumer is willing to purchase at each level of price. The fundamental law of demand stated that this curve in downward sloping.
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Demand deposit
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Funds deposited in a band which is transferable by check, that is, withdrawn on demand.
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Demand curve for labor
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The curve depicting the amount of labor firms desire at various wage rates. It is a derived demand because labor inputs are not desired for their own sake, but rather for the useful goods the produce. It is a downward sloping curve because of the law of diminishing marginal product.
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Demand curve for money
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The curve depicting the negative relationship between the amount of real money balances desired by individuals at any given nominal rate of interest, the price of holding money.
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Demand schedule
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A table displaying the quantity demanded of a good for selected price. A discrete form of the demand curve.
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Depreciation
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The amount by which the value of capital is reduced by wear and tear or used up over a given period of time.
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Depression
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A severe or prolonged economic recession, marked by substantial unemployment and reduced aggregate output.
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Deregulation
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The revoking of government regulations to allow the market to function more freely.
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Derived demand
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The demand which results not from the desire for the good (input) itself but from the goods or services of the good (input) produces. Example: the demand for labor
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Diamond-water paradox
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The puzzling observation that water, a necessity for life, is relatively very cheap, whereas diamonds, which are pleasant frivolities are relatively expensive.
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Differentiated industry
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An industry where firms sell non-homogeneous products, and face demand curves that are downward sloping to some degree.
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Differentiated products
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Goods which are very similar but not viewed as perfect substitutes by consumers, such as different brands of the same good.
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Diminishing returns
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An imprecise term; in economics, meaning either diminishing returns at the extensive margin or diminishing returns at the intensive margin.
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Diminishing returns at the extensive margin
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The phenomenon that when industries expand, eventually the ability to replicate the productive process decreases, as firms must use inputs that are less and less efficient.
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Diminishing returns at the intensive margin
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When more of identical units of a productive input are added to a fixed amount of other factors of production, the amount by which the input increases output becomes smaller and smaller.
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Discouraged workers
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Those workers who have dropped out of the labor force because there have been discourages, that is, unable to find employment.
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Discrimination
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In the labor market, the use by firms of factors unrelated to marginal productivity in employment. More generally, the use of variable unrelated to merit in decision affect people.
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Dissipation of rents
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The loss of mutual benefits, especially due to lack of clear property rights.
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Distortionary taxes
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Taxes which cause price to deviate from marginal costs, creating deadweight losses.
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Dividends
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A share of a firm’s profits which are paid to shareholders.
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Division of labor
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Breaking up a given task into smaller and more specialized tasks.
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Double coincidence of wants
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The condition of successful barter; individual A has what individual B wants and individual B has what A wants.
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Duplication of measurement
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The problem caused by imperfect information, where both the buyer and the seller expand resources to evaluate some good.
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Durable good
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Consumer goods which provide a service over a relatively long period of time.
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Dynamic consistency
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The property that the marginal value of consumption in any period, in terms of foregone future consumption, is independent of the date of that choice.
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Dynamic efficiency
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An allocation of resources is dynamically efficient if it maximizes the present value of net benefits that can be feasibly generated over time.

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