Micreconomics III

consumer surplus (CS)

the area below the demand curve and above world price

producer surplus (PS)

the area above the supply curve and below the world price

autarky

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

exported

if world price is above autarky price, goods are ___

imported

if world price is below autarky price, goods are ___

equal to (=)

equilibrium world price is found when one country’s surplus is ___ another’s shortage

tariff

a tax levied on imports

accounting profit

explicit costs subtracted from revenue

economic profit

opportunity costs subtracted from revenue

total revenue

price multiplied by quantity

total opportunity cost

opportunity cost multiplied by quantity

explicit cost

a cost that requires an outlay of money

implicit cost

a cost that does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone

marginal benefit

the additional benefit derived from producing one more unit of a good or service

marginal cost

the additional cost incurred by producing one more unit of a good or service

equal to (=)

optimal point of production is found where marginal benefit is ___ marginal cost

greater than (>)

economic profit is incurred when price is ___ average total cost; new firms are incentivized to enter the market

less than (<)

economic loss is incurred when price is ___ average total cost; firms are incentivized to leave the market

principle of “either-or” decision making

when facing an “either-or” choice between two activities, choose the one with the positive economic profit

sunk cost

a cost that has already been incurred and is not recoverable; should be ignored in decisions about future actions

economic rationality

individuals making decisions that leave them better off

loss aversion

oversensitivity to loss, leading to unwillingness to recognize a loss and move on

mental accounting

the habit of mentally assigning dollars to different accounts so that some dollars are worth more than others

status quo bias

the tendency to avoid making a decision and stick to the status quo

utility

a measure of the satisfaction derived from consumption of goods or services

util

a unit of utility

consumption bundle

the collection of all the goods and services that can be consumed by a given individual

marginal utility (MU)

the change in total utility generated by consuming on additional unit of a good or service

highest

the unit that delivers the most satisfaction has the ___ marginal utility

principle of diminishing marginal utility

the proposition that each successive unit of a good or service consumed adds less to total utility than did the previous unit

substitution effect

an increase in quantity demands that comes from consumers having a greater incentive to buy a good whose price is relatively lower

income effect

an increase in quantity demands that are attributable to changes in purchasing power as the price of a good falls

total effect

an increase in quantity demands attributable to the combination of the income and substitution effect

marginal rate of substitution (MRS)

the willingness of a consumer to replace one good for another good, as long as the new good is equally satisfying

indifference curve (IC)

a contour line that shows all consumption bundles that yield the same amount of total utility for an individual

indifference curve map

a collection of indifference curves for a given individual that represents the individual’s entire utility function; each curve corresponds to a different total utility level and never intersect

closer

indifference curves positioned ___ to the origin are less preferred

farther

indifference curves positioned ___ from the origin are more preferred

Giffen good

the hypothetical inferior good for which the income effect outweighs the substitution effect and the demand curve slopes upward

excludable

referring to a good, describes the case in which the supplier can prevent those who do not pay from consuming the good

rival in consumption

referring to a good, describes the case in which one unit cannot be consumed by more than one more person at the same time

private good

a good that is both excludable and rival in consumption

nonexcludable

referring to a good, describe the case in which the supplier cannot prevent consumption by people who do not pay for it

nonrival in consumption

referring to a good, describes the case in which the same unit can be consumed by more than one person at the same time

free-rider problem

problem that results when individuals who have no incentive to pay for their own consumption of a good take a “free ride” on anyone who does pay; a problem with goods that are nonexcludable

efficient

a market for a private good with no externalities produces an ___ quantity of goods

inefficient

a market for an artificially scarce good, also known as club good, produces an ___ quantity of goods

inefficient

a market for a common resource produces an ___ quantity of goods

inefficient

a market for a public good produces an ___ quantity

mean household income

the average income across all households

median household income

the income of the household lying at the exact middle of the income distribution

poverty threshold

the annual income below which a family is officially considered poor

poverty rate

the percentage of the population with incomes below the poverty threshold

Gini coefficient

a number that summarizes a country’s level of income inequality based on how unequally income is distributed across quintilest

0

if an economy’s income is completely equally distributed, then the value of its Gini coefficient is ___

1

if an economy’s income is completely unequally distributed, then the value of its Gini coefficient is

Medicare

covers a wide range of medical expenses, including hospitalization and prescription drug benefits; available to all Americans age 65 and older; must have worked for at least ten years paying premiums

Medicaid

this program provides health insurance coverage to selected low income people, particularly families; does not focus on the elderly or disabled; run through state level agencies

Temporary Assistance for Needy Families

under this law, a state receives a certain amount of money from the federal government to use on any of its programs that have an anti-poverty component

Supplemental Nutrition Assitance Program (SNAP)`

this program provides low income people with coupons that can be redeemed at grocery stores for food; it does not focus on people of a certain age or health status

Earned Income Credit

this policy provides a tax refund to families with children who have a low income; the tax refund increases to a certain point and then decreases once that point is reached; families that make over $100,000 do not receive this tax credit

adverse selection

occurs when information asymmetry leads to a reduction in the quality of a population

moral hazard

the tendency of one party to a contract or agreement to alter her or his behavior, after the contract is signed, in ways that could be costly to the other party

screening

a means of overcoming adverse selection involving filtering out false information and retaining true information

signaling

a means of overcoming adverse selection involving a more knowledgeable party signaling what they know through their actions

Veterans Health Administration

a program that provides medical and healthcare services to members of the armed forces and their families

employment-based insurance

an insurance plan purchased by individuals through their place of work; benefits are untaxed and often considered subsidized by the federal government

direct-purchase insurance

a medical insurance plan purchased by an individual without the aid of a company or organization; full cost for this kind of program is borne by the individual

welfare state

the collection of government programs that are designed to alleviate economic hardship

the level of production

the marginal product of a factor shows how much an additional unit of a factor adds to ___

dollar revenue

the marginal revenue product of a factor shows how much an additional unit of a factor adds to ___

equal to

a profit-maximizing firm operating in a perfectly competitive market will add new units of a factor of production until marginal revenue product is ___ factor price

value of the marginal product (VMPx)

the value of the additional output generated by employing one more unit of a given factor; calculated by multiplying price by marginal product

compensating differentials

wage differences across jobs that reflect the fact that some jobs are less pleasant or more dangerous than others

human capital

the improvement in labor created by education and knowledge that is embodied in the workforce

efficiency-wage model

a model in which some employers pay an above-equilibrium wage as an incentive for better performance

Ricardian model of international trade

a model that analyzes international trade under the assumption that opportunity costs are constant

comparative advantage

the opportunity cost for producing a good or service in a country is lower for that country than for other countries

Hecksher-Olin model

a model of international trade in which a country has a comparative advantage in a good whose production is intensive in the factors that are abundantly available in that country

private good

a good that is rival in consumption and excludable

artificially scarce good

a good that is nonrival in consumption but excludable

common resource

a good that is rival in consumption but nonexcludable

public good

a good that is nonrival in consumption and nonexcludable

means-tested program

benefiting only individuals or families whose income falls below a certain level

in-kind benefit

a benefit in the form of goods or services