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Details Title: Econ 002 - Overall Description: Definitions Total Flash Cards: 46 Created: 05/08/2007 10:00:57	To study from this set of flash cards, or to create your own your own study flash cards, register HERE. If you are already a registered user, CLICK HERE.
Cards Term Efficient Market Hypothesis Definition theory that markets combine all available information into the current price Term Asymmetric Information Definition imbalances in the information when one party knows more than the other Term Adverse Selection Definition arises whenever those who are the worst risks are the ones most likely to be a part of a transaction EX- prevents lenders from making loans, dating services Term Moral Hazard Definition occurs because of a change in behavior AFTER a transaction or policy is completed EX- Insurance, Loans (paying off debts) Term Principal Agent Problem Definition a conflict exists between agents charged with carrying out the wishes of absentee owners (own objectives over firms principals & goals) EX- travelling first class, company vehicles, extravagant expense accounts Term Eliminate Adverse Selection Definition get more information EX- mechanic look at the used car first Term Eliminate Moral Hazard Definition fix incentive structure EX- require collateral for a loan Term Eliminate Principal-Agent Definition make more frequent observations Term Positive Time Preference Definition spending more than your income Term Negative Time Preference Definition when you save a portion of your income for future consumption Term Interest Rate Definition price of borrowing Term Pure Rate of Interest Definition the price of earlier availability Term Positive Pure Rate of Interest Definition more positive time preference users than negative time preference Term Risk Premium Definition the price you pay to compensate the lender for the risk of you paying of the loan Term Inflationary Premium Definition the price you pay to compensate the lender for the change in prices between the time you borrow the funds and when you payoff the loan Term Risk Aversion Definition taking the sure thing even when it pays less Term Preference Reversal Definition risk tolerance changes from risk aversion to risk taking Term Proprietorships Definition easy to form and dissolve, simple decision making, profit is taxed once unlimited liability Term Unlimited Liability Definition owner of firm is personally responsible for all debts Term Partnerships Definition easy to form, relatively easy to dissolve, simple decision making, profit is taxed once permits more effective specialization Term Corporations Advantages Definition 1) Persons own share in company 2) Limited Liability 3) Can raise large sums of money Term Corporations Disadvantages Definition 1) Double Taxation 2) Separation of ownership and control Term The Law of Diminishing Returns Definition an increased number units of a variable factor in the production process are applied to a fixed set of resources, output will eventually increase by smaller and smaller amounts Term Minimium Efficient Scale (MES) Definition the lowest rate of output per unit time at which long-run average costs for a particular firm are at a minimum Term Small MES Definition high degree of competition due to low barriers to entry Term Large MES Definition less competition and often time high prices Term Sunk Costs Definition costs that have already been incurred as a result of past decisions. historical costs that are irrelevant because they are no longer an opportunity cost Term Sunk Cost Trap Definition attachment to existing item that prevents you from switching to a newer, better option Term Markets Definition study of how society is organized provide incentives to produce goods and services that others want Term What does it take to create Pure Competition? Definition 1) The firms in the market produce identical products 2)A large number of firms exist in the market 3)Each firm supplies only a very small portion of the market 4)Firms are free to enter and leave the market Term Profit Maximizing Rule Definition the price taker will expand output until marginal revenue is just equal to the marginal cost Term MR=MC Definition condition for stopping production at the point where profit opportunities no longer exist Term MR>MC Definition production continues to be profitable and firm should expand production Term MR Definition firm is producing too much Term Production Efficiency Definition occurs whenever the firm producces at the level consistent to the minimum point on the ATC curve Term Allocative Efficiency Definition occurs when the price charged is equal to the MC of production Term Invisible Hand Definition the idea that markets serve the common good Term Monopoly Definition a market that is a single seller who produces a well-defined product for which there are no good substitutes. Term Barriers to Entry Definition 1) Ownership of resources without close substitutes 2) Problems raising adequate capital 3) Economies of scale - low unit costs and prices drive out rivals Term Price Discrimination Definition exists when a business sells a given prodcut at more than one price with difference being unrelated in difference in cost Term Rent-Seeking Definition competing to become a monopolist resources will be wasted in attempt to secure and maintain grants of market protection Term Solutions to Monopoly Definition 1) Restructure the industry in order to create rivals 2) Reduce trade barriers 3) Regulate Producers with monopoly power Term Random Walk Theory Definition The theory that there are no predictable trends in stock prices that can be used to "get rich quick". Term Inside Information Definition information that is not available to the general public about what is happening in a corporation Term Present Value Definition the value of a future amount expressed in today's dollars Term Present Value Equation Definition ___ = Future Value/ 1 + interest rate (i)