Econ 1014 Mizzou Final Exam Terms & Definitions

Four types of goods

rival / non rival and excludable / non exculdable

rival / non rival

a good is non rival if one person's use of the good does not reduce the ability of another person to use the same good. Tofu is a rival good, cable tv is not rival, and wifi is not rival.

exculdable / non exculdable goods

a good is excludable if poeple who don't pay for it can easily be prevented from obtaining it. Tofu is excludable, tuna in the ocean is non-excludable, air is non-excludable, public-access roads are non excludable.

private goods

excludable and rival. can be efficiently provided in competitive markets. the only people excluded from consuming a private good in a competitive market are those who are not willing to pay for it.

club goods

non-rival and excludable. Private provison, cable tv, wifi, movie theater, computer software, and digital music.

public goods

Goods that are neither excludable nor rival in consumption such as national defense, mosquito control, public sanitation / public health, lighthouses. governments usually produce public goods

market failure

"free rider" problem. private markets underprovide public goods due to non-excludability, and since public goods are non-rival, the DWL from this underproduction can be quite large.

what two word phrase explains why the market will under provide public goods

free riders

free riders

someone who pays a share of the costs of a public good (through taxation) but who does not enjoy the benefits

common resources

rival and non-excludable such as ocean fishing, air, grazing land, the water table.

Tragedy of the commons

situation in which people acting individually and in their own interest use up commonly available but limited resources, creating disaster for the entire community

normative statment

claims that attempt to prescribe how the world should be

positive statement

principle testable or that can be disproven. it does not express a value judgment.

positive economics

describing, explaining, or predicting economic events

normative economics

recommendations or arguments about what public policy should be

public choice

the study of political behavior using the tools of economics

rational ignorance

benefits of being informed are less than the costs of becoming infomred

U.S. foreign aid

1%

median voter theorem

a proposition predicting that when policy options can be arrayed along a single dimension, majority rule will pick the policy most preferred by the voter whose ideal policy is to the left of half of the voters and to the right of exactly half of the voters

implication of the median voter theorem

we would not expect to see large differences in policy potions b/w two candidates in the same race.

voting paradoxes

private preferences display certain logical properties

positive

voting doesn't work as well as markets in meeting indiviual needs or using resources efficiently

normative

it may be better to use markets where possible

risk and return

owning financial assets involves risk

dividend rate

(dividend x period)/ price of stock x 100%

Percentage change in a stock price

new price - original price/original price x 100%

rate of return

return - change in price %

stock

a share of stock indicates ownership of a poriton of a publically traded firm

discounting

investment x (investment x intrest)

value of your share

value of company divided by number of total shares

return from stock

%price = dividend rate

bonds

debt instruments issued by a firm, the firm is borrowing money and agrees to pay it back at a fixed interest rate. example $1000 five year bond, coupon rate = 10%. $100 annual coupon payment + face value after five years

diversification

Spreading out investments to reduce risk

idiosyncratic risk

workers go on strike, new tech, medical discoveries

mutual fund

fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets

passive funds

seek to mimic some market average

active funds

seek to beat the market

rule of 70

the amount of time it takes an investment to double is approximately 70/(annual rate of return).

exploitation

taken to the extreme does this argment imply that it is unethical to buy anything from poor people. and if the concern is with regard to the level of risk inherent in the transaction.

Rawl's maximin principle

The government should maximize the benefits going to the most disadvantaged group.

the veil of ignorance

making decisions with a blind eye to extraneous factors that could affect the decision

utilitarianism

the government should implement policy to maximize a society's total utility

Nozick's Entitlement Theory

the distribution of income itself does not matter as long as the income was justly obtained via free trade between two agreeable parties.

principal-agent problems

a common problem is when a principal hires, contracts, or relies upon an agent to conduct some activiyt for the benefit of the principal

privatization

private prisons have incentives to lower costs but may do so at the expense of quality.

piecework

poor quality, but can be succesful if quality can be controlled.

tie pay to performance in a way that minimizes uncontrollable risk

salary or houlry pay. risk stays with employer, less incentinve for performance, termination or promotion are the main punishments/rewards.

Risk aversion

workers perfer a set salary compared to a risky one.

tournmanet

grading on the curve is a tournament, employees ranked against one another. reduces environment risk but adds ability risk; someone can't control someon else's ability. works best when enviornment risk is more important than ability

moral hazard

a situation in which an economic actor changes his or her behavior because a poriton of the cost associated with the behavior has been shifted to another party

adverse selection

a situation in which there is a state of nature known only to one party and the informed party seeks out economic transacitons that take advantage of the information asymmetry to the detriment of the other party