Econ Terms Exam 2

Health care

Goods and services, such as prescription drugs, consultations with doctors, and surgeries, that are intended to maintain or improve a person’s health.

Affordable Care Act (ACA)

Health care reform legislation passed by Congress and signed by President Barack Obama in 2010.

Health insurance

A contract under which a buyer agrees to make payments, or premiums, in exchange for the provider’s agreeing to pay some or all of the buyer’s medical bills.

Fee-for-service

A system under which doctors and hospitals receive a payment for each service they provide.

Asymmetric information

A situation in which one party to an economic transaction has less information than the other party.

Adverse selection

The situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.

Moral hazard

Actions people take after they have entered into a transaction that make the other party to the transaction worse off.

Principal–agent problem

A problem caused by an agent pursuing the agent’s own interests rather than the interests of the principal who hired the agent.

Market-based reforms

Changes in the market for health care that would make it more like the markets for other goods and services.

Sole proprietorship

A firm owned by a single individual and not organized as a corporation.

Partnership

A firm owned jointly by two or more persons and not organized as a corporation.

Corporation

A legal form of business that provides owners with protection from losing more than their investment should the business fail.

Asset

Anything of value owned by a person or a firm.

Limited liability

A legal provision that shields owners of a corporation from losing more than they have invested in the firm.

Corporate governance

The way in which a corporation is structured and the effect that structure has on the corporation’s behavior.

Separation of ownership from control

A situation in a corporation in which the top management, rather than the shareholders, controls day-to-day operations.

Indirect finance

A flow of funds from savers to borrowers through financial intermediaries such as banks. Intermediaries raise funds from savers to lend to firms (and other borrowers).

Direct finance

A flow of funds from savers to firms through financial markets, such as the New York Stock Exchange.

Bond

A financial security that represents a promise to repay a fixed amount of funds.

Coupon payment

An interest payment on a bond.

Interest rate

The cost of borrowing funds, usually expressed as a percentage of the amount borrowed.

Stock

A financial security that represents partial ownership of a firm.

Dividends

Payments by a corporation to its shareholders.

Risk

The degree of uncertainty in the return on an asset.

Liability

Anything owed by a person or a firm.

Income statement

A financial statement that shows a firm’s revenues, costs, and profit over a period of time.

Accounting profit

A firm’s net income, measured as revenue minus operating expenses and taxes paid.

Explicit cost

A cost that involves spending money.

Implicit cost

A nonmonetary opportunity cost.

Economic profit

A firm’s revenues minus all of its implicit and explicit costs.

Balance sheet

A financial statement that sums up a firm’s financial position on a particular day, usually the end of a quarter or year.

Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)

Legislation passed during 2010 that was intended to reform regulation of the financial system.

Present value

The value in today’s dollars of funds to be paid or received in the future.

Bond price

The market value of a bond.

Stock price

The market value of a stock.

Tariff

A tax imposed by a government on imports.

Imports

Goods and services purchased domestically that are produced in other countries.

Exports

Goods and services produced domestically and sold in other countries.

Autarky

A situation in which a country does not trade with other countries.

Terms of trade

The ratio at which a country can trade its exports for imports from other countries.

External economies

Reductions in a firm’s costs that result from an increase in the size of an industry.

Free trade

Trade between countries that is without government restrictions.

Quota

A numerical limit that a government imposes on the quantity of a good that can be imported into the country.

Voluntary export restraint (VER)

A restriction on the quantity of a good that can be imported by one country from another country.

World Trade Organization (WTO)

An international organization that oversees international trade agreements.

Globalization

The process of countries becoming more open to foreign trade and investment.

Protectionism

The use of trade barriers to shield domestic firms from foreign competition.

Dumping

Selling a product for a price below its cost of production.

Marginal Utility

The change in total utility a person receives from consuming one additional unit of a good or service.

Law of Diminishing Marginal Utility

As consumers consume more of a good or service, marginal utility decreases.

Budget Constraint

The limited amount of income available to consumers to spend on goods and services.

Substitution Effect

Holding constant the effect of price change on consumer purchasing power, the change in quantity demanded that results from a change in price making the good more or less expensive relative to the other goods.

Network Externality

A situation in which the usefulness of a product or service increases with the number of consumers using it.

Behavioral Economics

The study of situations in which people make choices that do not appear to be economically rational.

Opportunity Cost

The highest valued alternative given up when deciding to engage in an activity.

Endowment Effect

The tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn’t already own it.

Sunk Cost

A cost that has already been paid and cannot be recovered.

Short Run

The period of time in which at least one variable is fixed.

Long Run

The period of time in which a firm can vary all of its inputs, adopt new technology, and increase or decrease the size of its physical plant.

Total Cost

The cost of all the inputs a firm uses in production.

Variable Cost

Costs that change as output changes.

Fixed Costs

Costs that remain constant as output changes.

Production Function

The relationship between the inputs employed by a firm and the maximum output the firm can produce with those inputs.

Average Total Cost

Total cost over quantity produced.

Marginal Product of Labor

The additional output a firm produces as a result of hiring one more worker.

Law of Diminishing Returns

The principle that adding more of a variable input, such as labor, to the same amount of fixed input will cause the marginal product of the variable input to decline.

Average Product of Labor

The total output produced by a firm divided by the quantity of workers.

Vertical merger

A type of merger that occurs when two companies operating at different stages of the production process for a particular product combine their operations.

Firms at different stages

Companies that are involved in different phases or steps of the production process for a specific product.

Production of a good

The process of creating or manufacturing a product for sale in the market.