Term
| situation in which the “free market outcome” is inefficient, in that there is a positive Dead weight-Loss at the resulting “free market level of trade.” government intervention may be able to improve the realized outcome |
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Definition
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Term
| Four common phenomena leading to substantial Market Failure |
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Definition
| “Market Power,” “Lack of Information,” “Public Goods,” and “Externalities. |
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Term
| When there are not “many participants” on one side of the market, then some individuals can have “substantial control over price.” A firm has _________ if they have some “control over the price of their output,” in that they “can increase price without losing all customers” and “must decrease price in order to increase sales.” |
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Definition
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Term
A market structure in which there is one single seller of a unique good for which there are no close substitutes
they can choose any price/quantity combination along the market demand curve
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Definition
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Term
| An industry in which there “economies of scale,” in that “average costs of production” decrease as a greater amount of output is produced |
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Definition
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Term
|
Definition
Most “utilities” are natural monopolies.
Government would often “regulate” a natural monopolist, in order to establish a quantity closer to the efficient level and a price below the non-regulated, profit- maximizing price. |
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Term
| An industry in which a single firm has established a substantial market share and subsequently erected barriers to entry to forestall competition. |
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Definition
Unnatural Monopoly or Artificial Monopoly |
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Term
| regulatory and legal action designed to promote freedom of entry and to prohibit the merger (or collusion) of competitive firms |
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Definition
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Term
| measure of industry concentration defined as the sum of market shares of the four largest firms in the industry ranges between 0 and 100 – a higher value suggests the industry is more concentrated or less competitive |
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Definition
Four Firm Concentration Ratio (C4) |
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Term
| measure of industry concentration defined as the sum of the ‘squared values of market shares’ over all firms in the industry (ranges between 0 and =2100 10,000 – a higher value suggests the industry is more concentrated or less competitive) |
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Definition
Herfindahl-Hirschman Index (HHI) |
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Term
| Decisions in markets are based upon comparisons of “benefits” and “costs.” Thus, in order to make good decisions, economic agents must have accurate information about such benefits and costs readily available. We might not realize the efficient level of trade if buyers or sellers have difficulty knowing their “true reservation price” (for buyers this is especially problematic for goods that are purchased infrequently or for which “quality” is difficult to observe [e.g., housing, education, cars, medical procedures]) |
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Definition
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Term
| a good that is “non-rival” in consumption and “non-excludable. |
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Definition
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Term
| a good that is “rival” in consumption and “excludable |
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Definition
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Term
a good for which consumption by one person does not diminish
the quantity or quality of consumption by others |
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Definition
|
|
Term
a good for which consumption by one person does diminish the
quantity or quality of consumption by others |
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Definition
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Term
| a good for which it is difficult to prevent consumption by those who do not pay for the good |
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Definition
|
|
Term
a good for which it is easy to prevent consumption by those who
do not pay for the good |
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Definition
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Term
| if public goods were supplied in the marketplace, many individuals would attempt to enjoy the benefits of units purchased by other consumers, while making no financial contribution to the provision of the good (this problem arises because of the “non-excludable” nature of public goods) |
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Definition
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Term
a cost of an activity that is borne by
someone not engaging in the activity |
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Definition
| External Cost or Negative Externality |
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Term
a benefit from an activity that is realized
by someone not engaging in the activity. [e.g., vaccines, installation of smoke
detector in an “attached apartment,” basic scientific research, planting of trees on a
hillside (for erosion control)] |
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Definition
| External Benefit or Positive Externality |
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Term
economic inefficiencies which arise as a result of government intervention in markets. Even in instance of “market failure”
it would be naïve to conclude that the outcome with government intervention will always be “better” than without government intervention. |
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Definition
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Term
| what are the seven sources of government failure |
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Definition
availablity of information
capture of regulators
collective action
rent seeking behavior
pork barreling
agency inertia
dead weight loss
taxes |
|
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Term
Efficient Government action requires the
“centralization” of a great deal of information. Groups that benefit from
government programs often have an incentive to “misrepresent” (and overstate)
their benefits from government programs |
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Definition
| Availability of Information |
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Term
every time a regulated industry captures the regulatory body set to oversee the industry
regulators often identify more with those in the industry they are regulating than with the general public |
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Definition
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Term
When a small group of people lobby for a program to get it passed. When this happens for multiple issuse the govt has an oversupply of goods. |
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Definition
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Term
| refers to the expenditure of real resources in an attempt to secure a fixed economic surplus, as opposed to actions which generate or increase the value of an economic surplus |
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Definition
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Term
James Buchanan argued that “politicians in a democracy act to maximize the probability of their reelection.
These are those public expenditures that give a relatively small benefit to citizens of a particular legislative district, while spreading larger costs over the entire population
"Big Dig” in Boston relocated 3.5 miles of preexisting Interstate Highway underground |
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Definition
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|
Term
government agencies often “take on a life of their own.”
.Employees have incentives to “expand the scope of their agency” in order to increase their own job security. |
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Definition
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|
Term
Government spending must be financed in some
manner, commonly by way of taxes. Almost all taxes distort costs and benefits
and therefore alter otherwise efficient economic choices by changing relative
prices. |
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Definition
| Deadweight-Loss and Taxes |
|
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Term
buyers have to pay a
certain amount to the government for every unit purchased or sellers have to pay a
certain amount to the government for every unit sold. |
|
Definition
| per unit tax” (or “quantity tax” |
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Term
a measure of “who bears the burden of the tax” in terms of
“decreased welfare.” |
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Definition
|
|
Term
refers to policies by the government designed to reshape the
distribution of income/consumption. |
|
Definition
|
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Term
| what are the 6 Determinants of Productivity, Income, and Wealth? |
|
Definition
natural talent ability
aquired skills
effort
inherited wealth
accumulated savings
seemingly unrelated supply and demand conditions |
|
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Term
| ___ is not distributed equally at birth; some people possess characteristics that allow them to be more productive |
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Definition
| Natural Talent and Ability |
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Term
Individual productivity depends in large part upon skills and
experiences acquired during education, training, and work experience |
|
Definition
|
|
Term
| Productivity is often largely dependent upon ____ |
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Definition
|
|
Term
Wealth is typically distributed less evenly than income;
much of this inequality in wealth results from inheritances (large blocs of wealth
passed from one generation to the next). |
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Definition
|
|
Term
The stock of wealth that an individual owns at any point in time is partly determined by previous consumption/savings decisions
the more consumption one foregoes in one period, the greater the amount of wealth available during the next period. |
|
Definition
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|
Term
Income depends in
large part on many economic conditions beyond which we have little control; a
workers “value” to a firm is highly dependent upon the price of the product he
helps to produce |
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Definition
| Seemingly Unrelated Supply and Demand Conditions |
|
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Term
| what are the 8 “justifications” for “Income Redistribution” |
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Definition
| Utilitarianism, Altruism, social contract, increase of social productivity, social control, shared growth, Democratic Process, Demand Stabilization |
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Term
School of thought founded by Jeremy Bentham which argued
that society should strive for the “greatest happiness for the greatest number of
people.” If the value of $1 is greater if you have less money, then social welfare
would be increased by taking $1 away from someone with a high level of wealth
and giving it to someone with a lower level of wealth. |
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Definition
|
|
Term
| Unselfish concern for the welfare of others. |
|
Definition
|
|
Term
A wealthy society has an obligation to guarantee everyone a
“minimum standard of living. |
|
Definition
|
|
Term
| Some argue that equality of incomes is critical for social cohesion and for reducing social problems |
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Definition
| Increase of Social Productivity |
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|
Term
Redistribution can be used as a tool to maintain social stability
by essentially “bribing” potentially disruptive members of society. |
|
Definition
|
|
Term
Economists are not in agreement about the relationship
between “income distribution” and “economic growth.” Some argue that an equal
income distribution will make continued growth in the future more likely (others,
noting the “disincentive effects” of redistribution policies, argue the exact
opposite). |
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Definition
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|
Term
| Providing access to redistributive policies is one way for politicians to influence the behavior of voters example politicians promising free healthcare to the elderly |
|
Definition
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|
Term
market economies are subject to fluctuations of macroeconomic activity (i.e.,
business cycles)
such fluctuations are sometimes caused by “underconsumption”
people with lower levels of income/wealth typically exhibit a “higher
marginal propensity to consume” and a “lower marginal propensity to save”
therefore, redistribution from rich to poor will increase the “marginal
propensity to consume” for society as a whole, reducing the likelihood and
severity of economic downturns |
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Definition
|
|
Term
under certain conditions,
the behavior of self-interested decision makers interacting in free markets will tend to
lead to outcomes which are “better” for all parties |
|
Definition
| Adam Smith’s notion of the Invisible Hand |
|
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Term
is any asset that is socially and legally accepted as payment for
goods/services |
|
Definition
|
|
Term
| what are the three functions of money? |
|
Definition
medium of exchange
store of value
unit of account |
|
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Term
| an asset used as payment when purchasing goods/services |
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Definition
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|
Term
| an asset that serves as a means of holding wealth |
|
Definition
|
|
Term
a basic measure of economic activity (e.g., in the United
States all “prices” are expressed in “dollar terms”) |
|
Definition
|
|
Term
| The free interaction between buyers and sellers in markets results in |
|
Definition
|
|
Term
the relationship between the price of a good and the quantity that consumers are willing and able to purchase, all other factors fixed
provides a summary of the behavior of buyers in a market |
|
Definition
|
|
Term
the relationship between the price of a good and the quantity that firms are
willing and able to sell, all other factors fixed |
|
Definition
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|
Term
all other factors fixed, a greater quantity of a good will be
demanded at lower prices |
|
Definition
|
|
Term
all other factors fixed, a greater quantity of a good will be supplied
at higher prices |
|
Definition
|
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Term
start by focusing on a particular
price, and then go over to the demand curve horizontally to determine the
corresponding quantity demanded at this particular price. |
|
Definition
| Horizontal Interpretation” of Demand Curve |
|
|
Term
start by focusing on a particular
quantity demanded, and then go up to the demand curve vertically to determine the
corresponding price at which this particular quantity would be demanded |
|
Definition
| Vertical Interpretation” of Demand Curve |
|
|
Term
start by focusing on a particular
price, and then go over to the supply curve horizontally to determine the corresponding quantity supplied at this particular price. |
|
Definition
| Horizontal Interpretation” of Supply Curve |
|
|
Term
start by focusing on a particular
quantity supplied, and then go up to the supply curve vertically to determine the
corresponding price at which this particular quantity would be supplied. |
|
Definition
| “Vertical Interpretation” of Supply Curve |
|
|
Term
the maximum dollar amount a buyer is willing to give
up in order to acquire an item. |
|
Definition
|
|
Term
the minimum dollar amount a seller is willing to accept
in order to part with an item. |
|
Definition
| sellers reservation price |
|
|
Term
At
any particular quantity demanded, the height of the demand curve illustrates the
“reservation price” of the buyer of that unit. At any particular quantity supplied, the
height of the supply curve illustrates the “reservation price” of the seller of that unit. |
|
Definition
| Height of Demand or Supply curve as an illustration of Reservation Price |
|
|
Term
a measure of the “gain” or “surplus” that a buyer obtains
from purchasing an item, defined as the difference between his reservation price for
the item and actual price paid. |
|
Definition
|
|
Term
a measure of the “gain” or “surplus” that a seller obtains from
selling an item, defined as the difference between actual price received and her
reservation price for the item. |
|
Definition
|
|
Term
measure of the “gain” or “surplus” that society as a whole realizes
from a trade, defined as the sum of Consumer’s Surplus and Producer’s Surplus |
|
Definition
|
|
Term
a “stable state” for a system which will persist as long as outside factors do not change.
we need to identify a “price/quantity pair” that is stable
not one purchase or seller can alter their behavior to increase their own surplus. |
|
Definition
|
|
Term
if we are there we will stay there, unless outside
forces change |
|
Definition
|
|
Term
at higher prices there is downward pressure on price
at lower prices there is upward pressure on price
therefore if we are at some other price, we will be pushed toward the equilibrium price |
|
Definition
|
|
Term
a measure of the total gains from trade realized by
consumers in a market, defined as the difference between buyer’s reservation price
and actual price paid added over all units purchased. |
|
Definition
|
|
Term
a measure of the total gains from trade realized by sellers in a market,
actual price received + seller’s reservation price /units purchased |
|
Definition
|
|
Term
a measure of the total gains from trade realized in a market
defined as the sum of Total Consumers’ Surplus and Total Producers’ Surplus in the market.
It is maximized by trading all units for which buyer’s price exceeds seller’s price |
|
Definition
|
|
Term
the difference between the “maximum possible level of
Total Social Surplus” and the “realized level of Total Social Surplus.” |
|
Definition
|
|
Term
| there are some units that we do not trade for which buyer’s reservation price is greater than seller’s reservation price |
|
Definition
| Inefficiency from “too little trade |
|
|
Term
we trade some units for which seller’s
reservation price is greater than buyer’s reservation price |
|
Definition
| Inefficiency from “too much trade |
|
|
Term
a change in demand consistent with consumers being more willing to purchase the good
every price the new quantity demanded is greater than the previous quantity demanded |
|
Definition
|
|
Term
| a change with consumers being less willing to purchase the good the product is less than the old price |
|
Definition
|
|
Term
a change in supply consistent with firms being more willing to
sell the good, in that at every price the new quantity supplied is greater than the
previous quantity supplied |
|
Definition
|
|
Term
a change in supply consistent with firms being less willing to
sell the good, in that at every price the new quantity supplied is less than the previous
quantity supplied |
|
Definition
|
|
Term
| what are the Determinants of Demand |
|
Definition
(1) a decrease in the price of a Complement Good
(2) an increase in the price of a Substitute Good
(3) an increase in income (for a Normal Good)
(4) a decrease in income (for an Inferior Good)
(5) an increased preference for the good by consumers
(6) an increase in “market size”
(7) an expectation of higher future prices.
“the opposite direction” = decrease in demand |
|
|
Term
| what are the determinants of supply (5) |
|
Definition
(1) decrease in the cost of any factors of production used to produce the good
(2) improvement in technology= reduced production cost
(3) realization of “natural events”
(4) increase in “market size”
(5) an expectation of lower future prices.
Changing in “the opposite direction” = decrease in supply. |
|
|
Term
| An Increase in demand (for whatever reason) will |
|
Definition
increase equilibrium price and
increase equilibrium quantity. |
|
|
Term
| A Decrease in demand (for whatever reason) will |
|
Definition
decrease equilibrium price and
decrease equilibrium quantity |
|
|
Term
| An Increase in supply (for whatever reason) will |
|
Definition
decrease equilibrium price and
increase equilibrium quantity. |
|
|
Term
| A Decrease in supply (for whatever reason) will |
|
Definition
increase equilibrium price and
decrease equilibrium quantity. |
|
|
Term
| what are the three things that are required for market outcomes to be efficient? |
|
Definition
many buyer and many sellers,
costless information about prices and other reservation values,
no external effects |
|
|
Term
there must be enough participants on both
sides of the market, so that no one party can individually influence price by changing their own actions |
|
Definition
| many buyers and many sellers |
|
|
Term
for decision
makers to be able to make good decisions, they need to have accurate information
available at relatively low cost |
|
Definition
| costless information about prices and other reservation values |
|
|
Term
many activities generate costs or benefits to individuals
not engaging in the activity; in the presence of such external effects, free markets
will not generate the efficient level of trade |
|
Definition
|
|
Term
| they serve as a vital “signaling device” in free market economies, directing resources to their most valuable use |
|
Definition
| Role of Profits in a free market economy |
|
|
Term
an entrepreneur is someone who organizes and manages a business, typically with considerable initiative and exposure to risk.
Profits can only serve as effective signals insofar as someone is able to recognize, appreciate, and respond according to different levels of profit |
|
Definition
|
|
Term
| Five “Desirable Characteristics” of a free market system |
|
Definition
Disequilibria are “self correcting”
Minimize the Need for Information Flows
Ample Incentives for Innovation
Relative Prices Reflect Relative Costs
Opposes the Concentration of Power |
|
|
Term
| caused by changes in demand or supply are self correcting due to the “stable” and “self enforcing” properties of market equilibrium |
|
Definition
|
|
Term
to implement the “efficient levels of production” across all markets
require the gathering and analyzing of information with reservation prices of all buyers and all sellers |
|
Definition
| Minimize the Need for Information Flows |
|
|
Term
in a market system innovators are rewarded
by being able to earn large profits in the short term; such profits for successful
innovations serve to direct research and development efforts toward those
activities that are most valued by society |
|
Definition
| Ample Incentives for Innovation |
|
|
Term
in a free market system there is a tendency for the price of a good to be driven toward its “marginal costs of production”
consumers must be voluntarily willing to pay an amount which covers these costs of production, implying that prices reflect both “the production costs of firms” as well as “the value consumers place on an item.” |
|
Definition
| Relative Prices Reflect Relative Costs |
|
|
Term
the administration of “planned economies” requires combining political and economic power
political decision makers control the citizenry through both the legal system and the economic system |
|
Definition
| Opposes the Concentration of Power |
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