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Econ Exam 2
ch4,7,8
53
Economics
Undergraduate 2
10/10/2011

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Term
Resource Market
Definition
the market for inputs used to produce goods and services
Term
price controls
Definition
government-mandated prices that are generally imposed in the form of maximum or minimum legal prices
Term
price ceiling
Definition
a legally established maximum price sellers can charge for a good or resource
Term
shortage
Definition
a condition in which the amount of a good offered for sale by producers is less than the amount demanded by buyers at the existing price. an increase in price would eliminate the shortage
Term
price floor
Definition
a legally established minimum price buyers must pay for a good or resource
Term
surplus
Definition
a condition in which the amount of a good offered for sale by producers is greater than the amount that buyers will purchase at existing price. a decline in price would eliminate the surplus
Term
minimum wage
Definition
legislation requiring that workers be paid at least the stated minimum hourly rate of pay
Term
black market
Definition
a market that operates outside the legal system in which either illegal goods are sold or legal goods are sold at illegal prices or terms
Term
tax base
Definition
the level or quantity of an economic activity is taxed.higher tax rates reduce the level of the tax base because they make the activity less attractive
Term
tax rate
Definition
the per-unit amount of the tax or the percentage rate at which the economic activity is taxed
Term
excess burden of taxation
Definition
another term for deadweight loss. it reflects losses that occur when beneficial activities are forgone because they are taxed
Term
average tax rate
Definition
tax liability divided by taxable income. it is the percentage of income paid in taxes
Term
progressive tax
Definition
a tax which the average tax rate rises with income. people with higher incomes will pay a higher percentage of their income taxes
Term
proportional tax
Definition
a tax in which the average tax rate is the same at all income levels.everyone pays the same percentage of income in taxes
Term
regressive taxes
Definition
a tax in which the average tax rate falls with the income.people with higher incomes will pay a lower percentage of their income in taxes
Term
marginal tax rate
Definition
the additional tax liability a person faces divided by his or her additional taxable income. it is the percentage of an extra dollar of income earned that must be paid in taxes. it is relevant in personal decision making
Term
subsidy
Definition
a payment the government makes to either the buyer or seller, usually on a per-unit basis, when a good or services is purchased or sold
Term
law of diminishing marginal utility
Definition
the basic economic principle that as the consumption of a product increases, the marginal utility derived from consuming more of it will eventually decline
Term
marginal utility
Definition
the additional utility, or satisfaction, derived from consuming an additional unit of a good
Term
marginal benefit
Definition
the maximum price a consumer will be willing to pay for an additional unit of a product. it is the dollar value of the consumer's marginal utility from the additional unit, and therefore it falls as consumption increases
Term
substitution effect
Definition
the part of an increase (decrease) in amount consumed that is the result of a good being cheaper (more expensive) in relation to other goods because of a reduction (increase) in price
Term
income effect
Definition
the part of an increase (decrease) in amount consumed that is the result of the consumer's real income being expanded (contracted) by a reduction (rise) in the price of a good
Term
price elasticity of demand
Definition
the percentage change in the quantity of a product demanded divided by the percentage change in the price that cause the change in quantity
Term
income elasticity
Definition
the percentage change in the quantity of a product demanded divided by the percentage change in consumer income that caused the change in quantity demanded
Term
normal good
Definition
a good that has positive income elasticity, so that, as consumer income rises, demand for the good rises, too
Term
inferior good
Definition
a good that has a negative income elasticity, so that, as consumer income rises, the demand for the good falls
Term
price elasticity of supply
Definition
the percentage change in quantity supplied, divided by the percentage change in the price that caused the change in quantity supplied
Term
resident claimants
Definition
individuals who personally receive the excess, if any, of revenues over costs
Term
team production
Definition
a production process in which employees work together under the supervision of the owner or the owner's representative
Term
shirking
Definition
working less than the expected rate of productivity, which reduces output
Term
principal-agent problem
Definition
the incentive problem that occurs when the purchaser of services (the principal) lacks full information about the circumstances faced by the seller (the agent) and cannot know how well the agent performs the purchased services.
Term
proprietorship
Definition
a business firm owned by an individual who possesses the ownership right to the firm's profits and is personally liable for the firm's debts
Term
partnership
Definition
a business firm owned by two or more individuals who possess ownership rights to the firm's profits and are personally liable for the debts of the firm
Term
corporation
Definition
a business firm owned by shareholders who possess ownership rights to the firm's profits, but whose liability is limited to the amount of their investment in the firm
Term
explicit costs
Definition
payments by a firm to purchase the services of productive resourcs
Term
implicit costs
Definition
the opportunity costs associated with a firm's use of resources that it owns

ex: wage income and interest
Term
opportunity cost of equity capital
Definition
the rate of return that must be earned by investors to induce them to supply financial capital to the firm
Term
economic profit
Definition
the difference between the firm's total revenues and its total costs, including both the explicit and implicit cost components
Term
normal profit rate
Definition
zero economic profit, providing just the competitive rate of return on the capital (and labor) of owners
Term
short run (in production)
Definition
a time period so short that a firm is unable to vary some of its factors of production
Term
long run (in production)
Definition
a time period long enough to allow the firm to vary all of its factors of production
Term
total fixed cost
Definition
the sum of the costs that do not vary with output. they will be incurred as long as a firm continues in business and the assets have alternative uses
Term
average fixed cost
Definition
total fixed cost divided by the number of units produced.it always declines as output increases
Term
total variable cost
Definition
the sum of those costs that rise as output increases
ex: wages paid to workers
payments for raw materials
Term
average variable cost
Definition
the total variable cost divided by the number of units produced
Term
average total cost
Definition
total cost divided by the number of units produced
aka per-unit cost
Term
marginal cost
Definition
the change in total cost required to produce an additional unit of output
Term
law of diminishing returns
Definition
the postulates that as more and more units of a variable resource are combined with a fixed amount of other resources, using additional units of the variable resource will eventually increase output only at a decreasing rate
Term
total product
Definition
the total output of a good that is associated with each alternative utilization rate of a variable input
Term
marginal product
Definition
the increase in the total product resulting from a unit increase in the employment of a variable input
Term
average product
Definition
the total product (output) divided by the number of units of the variable input required to produce that output level
Term
economics of sale
Definition
reductions in the firm's per-unit costs associated with the use of large plants to produce a large volume of output
Term
constant returns to scale
Definition
unit costs that are constant as the scale of the firm is altered
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