# Shared Flashcard Set

## Details

AP Microeconomics Unit 4
Vocabulary and Concepts from Chapters 12, 13, & 14
49
Economics
11/08/2012

Term
 Derived Demand
Definition
 Demand for a resource is derived from the demand for the products that the resource helps produce as resources indirectly satisfy consumer wants through production
Term
 Marginal Product (MP)
Definition
 The additional output resulting from each additional unit of labor that is limited by the law of diminishing marginal revenue for successive units of output
Term
 Marginal Revenue Product (MRP)
Definition
 The change in total revenue resulting from the use of each additional unit of a resource:MRP = Change in total revenue / unit change in resource quantity
Term
 Marginal Resource Cost (MRC)
Definition
 The amount that each additional unit of a resource adds to the firms total cost: MRC = Change in total Resource Cost / Unit Change in Resource Quantity
Term
 MRP = MRC Rule
Definition
 States that resource inputs will increase when MRP > MRC and decrease when MRP < MRC with the ideal input occurring at MRP = MRC.
Term
 Substitution Effect
Definition
 Indicates that a firm will purchase more of an input whose relative price has declined and use less of an input whose relative price has increased.
Term
 Output Effect
Definition
 Lower production costs prompt firms to increase their output, causing the firm to purchase more of one particular input when the price falls.
Term
 Elasticiy of Resource Demand
Definition
 Measures the sensitivity of resource quantity to changes in resource price along a fixed resource demand curve: Erd = Percentage Change in Resource Quantity Demanded / Percentage Change in Resource PriceWhen Erd < 1 = Inelastic, Erd = 1 = Unit Elastic, Erd > 1 = Elastic
Term
 Least-Cost Combination of Resources
Definition
 The cost of any output is minimized when he ratios of marginal product to price of the last units of resources used are the same for each resource MPL/PL = MPC/PC
Term
 Profit-Maximizing Combination of Resources
Definition
 Condition that must hold for every variable resource that each resource must be employed to the point at whcih its marginal revenue product equals its resource price:MPL/PL = MPC/PC = 1
Term
 Marginal Productivity Theory of Income Distribution
Definition
 States that income is distributed according to society's output such that MRP provides fair and equitable income.
Term
 Wage Rate
Definition
 The price paid per unit of labor servies (an hour) including direct money payments as well as fringe benefits.
Term
 Nominal Wage
Definition
 The amount of money received per hour, day or year
Term
 Real Wage
Definition
 Quantity of goods and services a worker can obtain with nominal wages (purchasing power).
Term
 Purely Competitive Labor Market
Definition
 Numerous firms compete in hiring qualified workers with identical skills, both firm and worker being "wage takers" since neither controls market wage. The market supply of labor is upsloping, representative of need for employers to pay higerh wages in order to attract labor. Labor supply faced by individual curves is elastic.
Term
 Monopsony
Definition
 Market structure in which there is only a single buyer of workers with limited employment options, allowing the firm to be a "wage maker" since wages vary with employees. Monosponists hire a lower quantity of workers at a lower wage rate than competitive firms are able to do. Generally, profits are maximized for the monopsonist because they cut wages of employees in comparison to the competitive firm.
Term
 Demand-Enhancement Model
Definition
 Unions atttempt to increase the demand for union labor as this will create higher union wages along with a greater quantity of jobs, thus unions take to political lobbying or altering the price of other inputs/depressing prices of complementary resources.
Term
 Exclusive Unionism Model
Definition
 Comprised of craft unions that force employers to only hire unino members which artificially restricts the labor supply as it reesults in higher wages.
Term
 Occupational Licensing
Definition
 Group of workers in a given occupation pressure government to pass legislation mandating that some occupational group can oly practice after meeting certain requirements.
Term
 Inclusive Unionism
Definition
 Comprised of industrial unions that seek to organize all available labor so that strikes cannot be broken by employing unskilled, non-union labor.
Term
 Bilateral Monopoly Model
Definition
 Pure form of union structure in which it is a monopolistic "seller" of labor that controls labor supply and affects wages but faces a monopsonistic "buyer" that affects wages through the amount of labor employed. Therefore, they tend to offset one another, though the actual effects of such a structure are indeterminate.
Term
 Minimum Wage
Definition
 Federally mandated "wage floor" that is supposed to help less-skilled workers earn enough income to escape from poverty.
Term
 Wage Differentials
Definition
 Differecnes in the annual salaries among various occupations as well as within the occupation itself.
Term
 Marginal Revenue Productivity
Definition
 Accounts for strength of the labor demand by considering both the worker's contribution to revenue and demand for product; high productivity and high demand leads to higher salaries.
Term
 Noncompeting Groups
Definition
 Occur on the supply side as a result of heterogeneous work force with different mental faculties and physical capabilities. There is the ability of few to be in the top occupations, and thus those that are receive higher pay.
Term
 Human Capital
Definition
 The personal stock of knowledge, know-how, and skills that enable a person to be productive and earn an income.
Term
 Compensating Differences
Definition
 Wage differentials that must be paid for nonmonetary differences in jobs such as a lack of fringe benefits, risk of injury, or irregular employment.
Term
 Principal-Agent Problem
Definition
 Associated with the possible differences in the interest of corporate stockholders (principals) and the executives (agents) they hire as both groups seek profit but the employees may shirk on the job.
Term
 Incentive Pay Plan
Definition
 Resolution to the principal-agent problem that ties worker compensation more closely to worker output or peformance by offering the following incentives for good work: (1) Piece Rates, (2) Commissions or Royalties, (3) Bonuses, (4) Profit-Sharing Plans, (5) Stock Options, and (6) Efficiency Wages.
Term
 Economic Rent
Definition
 The price paid for the use of land and other natural resources that are completely fixed in total supply. Demand is derived and downsloping due to the law of diminishing returns and the supply is perfectly inelastic as land has no production costs and is in fixed quantity.
Term
 Free Good
Definition
 A good for which demand is so weak relative to supply that an excess supply of it occurs even if the market price is zero. (Think: undesirable, non-arable land).
Term
 Incentive Function
Definition
 A high price for a non-land resources provides an incentive to offer more of the resource, whereas a low price prompts resource supplies to offer less.
Term
 Surplus Payments
Definition
 Economic rent is not necessary to ensure that land is made available for economic use as it does not serve an incentive function (area of the land remains the same).
Term
 Single Tax Movement
Definition
 Henry George's criticism of rental payments that postulated economic rent could be heavily taxed without diminishingt he supply of land or reducing the efficiency with which it is allocated. Argues that an increase in economic rent deovied of any productive effort on part of landowner belongs to society. Allocative efficiency is still maintained as some rental income is better than non when facing a tax on land.
Term
 Interest
Definition
 The price paid for the use of money expressed as a percentage for comparison; money is borrowed not because it is an economic resource, but rather because of its purchasing power in the immediate time frame. Influenced by the following factors: maturity, loan size, risk, and taxability.
Term
 Interest Income
Definition
 The amount eaerned by households for providing capital to firms that cannot exceed the amount of interest firm would need to pay to buy the capital outright instead of leasing from the household.
Term
 Pure Rate of Interest
Definition
 Hypothetical interest rate that would serve purely and solely to compensate lenders for their willingness to patiently forgo alternative consumption and investment opportunities until their money is repaid.
Term
 Loanable Funds Theory of Interest
Definition
 States that differing interest rates on loans are a result of the supply of and demand for funds available for lending in the loanable funds market, with equilibrium occurring at the intersection of supply and demand curves. Supply of loanable funds is UPSLOPING, representing that households will make larger quantity of funds available at higher interest rates. Demand for loanable funds is DOWNSLOPING because at higher interest rates, fewer firms will expand.
Term
 Time-Value of Money
Definition
 Idea that a specific amount of money is more valuable to a person the sooner it is obtained given the potential to accrue interest over time (the higher the interest rate, the greater the time-value).
Term
 Compound Interest
Definition
 The total interest that cumulates over time of moeny placed in an interest-bearing account. A(t) = Pr^t
Term
 Future Value
Definition
 Amount to which some principal will grow as interest compounds over time.
Term
 Present Value
Definition
 Today's value of some amount of money to be received in the future.
Term
 Nominal Interest Rate
Definition
 Rate of interest expressed in dollars of current value unaffected by economic situations.
Term
 Real Interest Rate
Definition
 Rate of interest expressed in purchasing power (dollars of inflation-adjusted value) that determines both investment and research and development decisions.
Term
 Usury Laws
Definition
 Specify a maximum interest rate at which loans can be made, establishing a price ceiling that holds down iterest cost of borrowing for low-income borrowers. Creates a shortage of laons sucht ath bank dictates who receives funding, typically creditworhty, high-income borrowers.
Term
 Economic Profit
Definition
 Equals the total revenue less explicit costs (payments made to outsiders) and implicit costs (opportunity costs) that may be either positive or negative.
Term
 Residual Claimants
Definition
 The entrepreneurs are subject to receive whatever residual revenue (if any) that remains after all factors of production have been paid, thus the financial risks are borne by the entrepreneurs.
Term
 Insurable Risks
Definition
 Risks faced by entrepreneurs for which it is possible to buy insurance to protect against such as fire, flood, theft, accident, and death.
Term
 Uninsurable Risks
Definition
 Risks faced by entrepreneurs for which it is not possible to purchase insurance as relative frequencies of occurrence cannot be accurately predicted. Include: changes in the general economy, changes in economic structure, changes in government policy, and new products/production methods that will affect the productivity and profits of the firm
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