Econ summer exam terms

Abnormal profit

Abnormal profit

when average revenue is greater than average cost

Abuse of market power

when a firm acts with the intention to eliminate competitors or prevent entry of new firms

Actual growth

when real GDP increases through time as a result of greater or better use of existing resources

Adverse selection

A type of market failure involving asymmetric information, where the party with the incomplete information is induced to withdraw from the market. (Ex: insurance market)

Aggregate demand

planned spending on domestic goods and services at different average price levels, C+I+G+(X-M)

Aggregate supply

The planned level of output domestic firms are willing and able to offer at different average price levels.

Allocative efficiency

when resources are optimally allocated and community surplus is maximized (P=MC, MSB=MSC)

Allocative inefficiency

when either more or less than the socially optimal amount is produced and consumed

Anchoring

refers to situations when people rely on a piece of info that is not relevant when making a decision

Anti-monopoly regulation

laws intended to restrict anti-competitive behavior of firms abusing their market power

Asymmetric information

A type of market failure where one party in an economic transaction has access to more or better information than the other party.

Automatic stabilizers

built in features that tend to decrease short term fluctuations in the business cycle w/o government intervention (progressive income taxes and unemployment benefits)

Average costs

total costs per unit of output produced

Average revenue

revenue earned per unit sold, equal to price of good

Barriers to entry

anything that deters entry of new firms into a market, like patents

Biases

systematic deviations from rational choice decision-making

Bounded rationality

suggests consumers and businesses have neither the necessary information nor the cognitive abilities required to maximize with respect to some objectives (such as utility), and thus choose to satisfice.

Bounded self-control

individuals may not always be able to act in their interests, like procrastination, that may result in self harm

Bounded selfishness

people do not always maximize self interest but have concern for well being of others

Budget deficit

when government expenditures exceed revenue

Business confidence

A measure of the degree of optimism that businesses have about the economic future.

Business cycle

short term fluctuations of real GDP around its long term trend or potential output

Business tax

tax on the income of business

Capital

means of production, ie tools, machines, equipment, factories and human capital, like education, training, skills of labor force

Capital gains tax

a tax on the profits realized from the sale of assets

Carbon tax

tax on the carbon content on fuel, type of pigouvian tax

Central bank

An institution charged with conducting monetary and exchange rate policy, regulating behavior of commercial banks, and providing banking services to the government and commercial banks.

Ceteris paribus

all other things being equal

Choice architecture

design of environments that affects choices of consumers

Collusive oligopoly

market where firms agree to fix price/ engage in anti-competitive behavior

Common pool resources

good that are non-excludable but rivalrous

Competitive Market

A market with many firms acting independently where no firm has the ability to control the price.

Competitive market equilibrium

Occurs if in a free competitive market, quantity demanded is equal to quantity supplied.

Competitive supply

when a good a firm is producing uses the same resources as another good, compete with each other for resources

Complements

goods jointly consumed, like peanut butter and jelly

Concentration ratios

The proportion of industry sales accounted for by the largest firms; the greater this proportion, the greater the degree of market power of the firms in the industry.

Consumer confidence

A measure of the degree of optimism that households have about their income and economic prospects.

Consumer nudges

Small design changes that include positive reinforcement and indirect suggestions that can influence the behaviour of consumers.

Consumer surplus

The difference between how much a consumer is at most willing to pay for a good and how much they actually pay.

Consumption (C)

Spending by households on durable and non- durable goods and on services

Contractionary fiscal policy

decrease in government expenditures and/or an increase in taxes that aim at decreasing aggregate demand

Contractionary monetary policy

employed by the central bank involving an increase in interest rates and aimed at decreasing aggregate demand

Corporate social responsibility

A corporate goal adopted by many firms that aims to create and maintain an ethical and environmentally responsible image.

Crowding out

when government uses fiscal policy to increase demand, increased borrowing leaves less room for private sector investment

Debt servicing

repayment of principal and interest on a debt

Default choice

option selected when one does nothing.

Deflationary gap

when equilibrium output is less than potential output because of a decrease in AD

Demand

the relationship between possible prices and quantities of g/s individuals are willing and able to buy

Demerit goods

g/s whose production and/or consumption harm the consumer and society at large (negative externalities)

Direct taxes

taxes on income, profits, or wealth paid directly to the government

Dumping

when a firm sells abroad at a price lower than average cost or below the domestic price

Economic growth

increases in real GDP over time

Economies of scale

falling average costs that a firm experiences when it increases its scale of production

Efficiency

the best use of scarce resources

Entrepreneurship

the ability of certain people to organize the other FOPs, and their willingness to take risks

Excess demand

shortage, quantity demanded exceeds quantity supplied

Excess supply

surplus, quantity supplied exceeds quantity demanded

Excludable

the characteristic of some goods, producers are able to charge a price therefore excluding whoever is unwilling to pay it

Expansionary fiscal policy

increase in gov’t expenditure/ decrease in taxes to increase AD

Expansionary monetary policy

aimed at increasing AD through a decrease in interest rates

External balance

balance between the goods exported and imported by an economy

Externalities

external costs/benefits to third parties as a result of the production or consumption of a g/s

Framing

manipulating the way choices are presented that may affect the choice made, ie highlighting positive/negative aspects of the same choice lead to different decisions

Free goods

goods that are not considered scare, like sea water, therefore have no opportunity cost

Free market economy

the means of production are privately owned, market forces determine answers to fundamental questions (what/how much to supply, etc) that economies face

Free rider problem

when individuals consume a g/s without paying for it because they cannot be excluded from enjoying it.

Full employment

macro goal to fully utilize the scarce FOP, labor. Exists when economy is producing at its potential level of real output (only natural unemployment)

Government spending

all spending by the government that is distinguished into current expenditures, capital expenditures, and transfer payments

Gross domestic product (GDP)

The value of all final goods and services produced within an economy over a period of time, usually a year or a quarter. (Nominal and real, which is adjusted for inflation)

Gross national income (GNI)

the income earned by all national FOPs independent of location over a period of time, equal to GDP + (factor income earned abroad — factor income paid abroad) (Nominal and real, which is adjusted for inflation)

Homogenous product

goods considered identical across firms in the eyes of consumers, mostly primary sector goods, markets close to perfect competition

Imperfect competition

A market structure where firms have a degree of market power as they face a negatively sloped demand curve and can thus set price.

Imperfect information

When the information about a market or a transaction is incomplete.

Import substitution

supply side policy, interventionist(K), firms are subsidized to shift production from imported to domestic

Incentive role of prices

Prices provide producers and consumers the incentive to respond to price changes. Given a price change, producers have the incentive to change the quantity supplied in accordance with the law of supply, while consumers have the incentive to change the quantity demanded based on the law of demand.

Income

flow of earnings using FOPs—wages (labor), interest (capital)

Income effect

helps to explain the law of demand, as the price of a good increases, real income decreases, consumers buy less of that good

Income elasticity of demand

the responsiveness of demand for a g/s in response to a change in income

Indirect taxes

taxes on expenditure to buy goods and services

Industrial policies

supply side, government chooses to support specific industries through tax cuts, subsidies, etc to grow economy

Inferior goods

Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases. EX

Inflation

a sustained increase in the average level of prices

Inflationary gap

the case where equilibrium real output exceeds potential output as a result of an increase in AD

Informal economy

Refers to the part of an economy where activity is not officially recorded, regulated or taxed. The activities of the informal economy are not included in a country’s national income figures.

Injections

in circular flow model, investment, government expenditure, exports

Interest rate

the cost of borrowing money

Interventionist supply side policies

increase an economy’s productive capacity thru government intervention

Investment

spending by firms on capital goods

Joint supply

goods jointly produces, like beeswax and honey

Keynesian AS

An aggregate supply curve that shows the level of real output produced in an economy in relation to the price level. It consists of three sections

Keynesian multiplier

the idea that an increase in an injection will lead to a change in real GDP because increased spending generates additional income

Keynesian school of thought

challenged classical (laissez faire) view, advocates for gov’t intervention

Law of diminishing marginal returns

as more and more units of the variable factor (usually labor) are added to a fixed factor (usually capital) there is a point beyond which total product continues to rise but at a diminishing rate, marginal returns start to decrease.

Law of diminishing marginal utility

The idea that as an individual consumes additional units of a good, the additional satisfaction enjoyed decreases. (Milk man)

Leakages

savings, taxes, import expenditure in circular flow

Long run aggregate supply (LRAS)

dependent upon the quality/quantity of FOPs, independent of price level . Vertical at the level of potential output. To increase, increase quality/quantity of FOPs

Long run (micro)

the timeframe when all FOPs are variable

Long run (macro)

timeframe when the price of all FOP, esp wages, change to match changes in price level

Long term growth

rightward shift in LRAS

Loss (firms)

when the costs of the firm exceed total revenue