when a firm acts with the intention to eliminate competitors or prevent entry of new firms
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Actual growth
when real GDP increases through time as a result of greater or better use of existing resources
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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)
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Aggregate demand
planned spending on domestic goods and services at different average price levels, C+I+G+(X-M)
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Aggregate supply
The planned level of output domestic firms are willing and able to offer at different average price levels.
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Allocative efficiency
when resources are optimally allocated and community surplus is maximized (P=MC, MSB=MSC)
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Allocative inefficiency
when either more or less than the socially optimal amount is produced and consumed
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Anchoring
refers to situations when people rely on a piece of info that is not relevant when making a decision
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Anti-monopoly regulation
laws intended to restrict anti-competitive behavior of firms abusing their market power
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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.
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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)
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Average costs
total costs per unit of output produced
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Average revenue
revenue earned per unit sold, equal to price of good
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Barriers to entry
anything that deters entry of new firms into a market, like patents
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Biases
systematic deviations from rational choice decision-making
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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.
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Bounded self-control
individuals may not always be able to act in their interests, like procrastination, that may result in self harm
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Bounded selfishness
people do not always maximize self interest but have concern for well being of others
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Budget deficit
when government expenditures exceed revenue
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Business confidence
A measure of the degree of optimism that businesses have about the economic future.
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Business cycle
short term fluctuations of real GDP around its long term trend or potential output
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Business tax
tax on the income of business
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Capital
means of production, ie tools, machines, equipment, factories and human capital, like education, training, skills of labor force
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Capital gains tax
a tax on the profits realized from the sale of assets
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Carbon tax
tax on the carbon content on fuel, type of pigouvian tax
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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.
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Ceteris paribus
all other things being equal
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Choice architecture
design of environments that affects choices of consumers
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Collusive oligopoly
market where firms agree to fix price/ engage in anti-competitive behavior
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Common pool resources
good that are non-excludable but rivalrous
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Competitive Market
A market with many firms acting independently where no firm has the ability to control the price.
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Competitive market equilibrium
Occurs if in a free competitive market, quantity demanded is equal to quantity supplied.
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Competitive supply
when a good a firm is producing uses the same resources as another good, compete with each other for resources
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Complements
goods jointly consumed, like peanut butter and jelly
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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.
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Consumer confidence
A measure of the degree of optimism that households have about their income and economic prospects.
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Consumer nudges
Small design changes that include positive reinforcement and indirect suggestions that can influence the behaviour of consumers.
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Consumer surplus
The difference between how much a consumer is at most willing to pay for a good and how much they actually pay.
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Consumption (C)
Spending by households on durable and non- durable goods and on services
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Contractionary fiscal policy
decrease in government expenditures and/or an increase in taxes that aim at decreasing aggregate demand
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Contractionary monetary policy
employed by the central bank involving an increase in interest rates and aimed at decreasing aggregate demand
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Corporate social responsibility
A corporate goal adopted by many firms that aims to create and maintain an ethical and environmentally responsible image.
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Crowding out
when government uses fiscal policy to increase demand, increased borrowing leaves less room for private sector investment
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Debt servicing
repayment of principal and interest on a debt
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Default choice
option selected when one does nothing.
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Deflationary gap
when equilibrium output is less than potential output because of a decrease in AD
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Demand
the relationship between possible prices and quantities of g/s individuals are willing and able to buy
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Demerit goods
g/s whose production and/or consumption harm the consumer and society at large (negative externalities)
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Direct taxes
taxes on income, profits, or wealth paid directly to the government
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Dumping
when a firm sells abroad at a price lower than average cost or below the domestic price
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Economic growth
increases in real GDP over time
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Economies of scale
falling average costs that a firm experiences when it increases its scale of production
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Efficiency
the best use of scarce resources
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Entrepreneurship
the ability of certain people to organize the other FOPs, and their willingness to take risks
the characteristic of some goods, producers are able to charge a price therefore excluding whoever is unwilling to pay it
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Expansionary fiscal policy
increase in gov’t expenditure/ decrease in taxes to increase AD
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Expansionary monetary policy
aimed at increasing AD through a decrease in interest rates
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External balance
balance between the goods exported and imported by an economy
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Externalities
external costs/benefits to third parties as a result of the production or consumption of a g/s
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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
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Free goods
goods that are not considered scare, like sea water, therefore have no opportunity cost
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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
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Free rider problem
when individuals consume a g/s without paying for it because they cannot be excluded from enjoying it.
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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)
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Government spending
all spending by the government that is distinguished into current expenditures, capital expenditures, and transfer payments
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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)
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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)
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Homogenous product
goods considered identical across firms in the eyes of consumers, mostly primary sector goods, markets close to perfect competition
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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.
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Imperfect information
When the information about a market or a transaction is incomplete.
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Import substitution
supply side policy, interventionist(K), firms are subsidized to shift production from imported to domestic
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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.
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Income
flow of earnings using FOPs—wages (labor), interest (capital)
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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
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Income elasticity of demand
the responsiveness of demand for a g/s in response to a change in income
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Indirect taxes
taxes on expenditure to buy goods and services
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Industrial policies
supply side, government chooses to support specific industries through tax cuts, subsidies, etc to grow economy
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Inferior goods
Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases. EX
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Inflation
a sustained increase in the average level of prices
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Inflationary gap
the case where equilibrium real output exceeds potential output as a result of an increase in AD
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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.
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Injections
in circular flow model, investment, government expenditure, exports
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Interest rate
the cost of borrowing money
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Interventionist supply side policies
increase an economy’s productive capacity thru government intervention
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Investment
spending by firms on capital goods
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Joint supply
goods jointly produces, like beeswax and honey
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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
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Keynesian multiplier
the idea that an increase in an injection will lead to a change in real GDP because increased spending generates additional income
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Keynesian school of thought
challenged classical (laissez faire) view, advocates for gov’t intervention
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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.
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Law of diminishing marginal utility
The idea that as an individual consumes additional units of a good, the additional satisfaction enjoyed decreases. (Milk man)
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Leakages
savings, taxes, import expenditure in circular flow
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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
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Long run (micro)
the timeframe when all FOPs are variable
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Long run (macro)
timeframe when the price of all FOP, esp wages, change to match changes in price level