Erhardt Microeconomics final

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Market work

time sold as labor

Nonmarket work

time spent getting an education or producing goods and services for personal consumption

Leisure

time spent on nonword activities

Substitute Effect of a Wage Increase

A higher wage encourages more work because other activities now have a higher opportunity cost

Income effect of wage increase

A higher wage increases a worker's income, increasing demand for all goods, including leisure, so that the quantity of labor supplied to market work decreases

Backward-Bending Supply Curve of Labor

As the wage rises, the quantity of labor supplied may eventually decline; the income effect of a higher wage increases the demand for leisure, which reduces the quantity of labor supplied enough to more than offset the substitution effect of a higher wage

Trust

any firm or group of firms that tries to monopolize a market

Labor union

A group of workers who organize to improve their terms of employment

Craft union

A union whose members have a particular skill or work at a particular craft, such as plumbers or carpenters. (AFL)

Industrial union

A union of both skilled and unskilled workers from a particular industry, such as autoworkers or steelworkers. (CIO)

AFL

American Federation of Labor

CIO

Congress of Industrial Organization

Collective bargaining

The process by which union and management negotiate a labor agreement

Mediator

An impartial observer who helps resolve differences between union and management

Binding Arbitration

negotiation in which union and management must accept an impartial observer's resolution of a dispute

Strike

A union's attempt to withhold labor from a firm to stop production

Three reasons for strikes

Job security, retirement package, health benefits

Sherman Antitrust Act of 1890

first national legislation in the world against monopolies: prohibited trusts, restraint of trade, and monopolization, but the law was vague and ineffective

Clayton Act of 1914

Strengthened Sherman Act, outlawed certain anticompetitive practices not prohibited by the Sherman Act: including price discrimination, tying contracts, exclusive dealing, interlocking directorates, and buying the corporate stock of a competitor

Market power

The ability of a firm to raise its price without losing all its customers to rival firms

Social regulation

Government regulation aimed at improving health and safety. Examples: OSHA, EPA

Economic regulation

Gov't regulation of natural monopoly, where, because of economy of scale, average production cost is lowest when a single firm supplies the market

Sherman Antitrust Act of 1890

first national legislation in the world against monopolies; prohibited trusts, restraint of trade, and monopolization, but the law was vague and ineffective

Public utilities

Gov't owned or gov't regulated monopolies

Tying Contract

A seller of one good requires a buyer to purchase other goods as part of the deal

Exclusive Dealing

A supplier prohibits customers from buying from other suppliers of the products

Interlocking Directorate

A person serves on the boards of directors of two or more competing firms

Federal Trade Commission (FTC) Act of 1914

Established a federal body to help enforce antitrust laws; run by commissioners assisted by economists and lawyers

Celler-Kefauver Anti-Merger Act

Passed in 1950, prevents one firm from buying the physical assets of another firm if the effect is to reduce competition. This law can block a horizontal or vertical merger

Horizontal Merger

A merger in which one firm combines with another that produces the same product

Vertical Merger

A merger in which one firm combines with another from which it had purchased inputs or to which it had sold output

Consent Decree

The accused party, without admitting guilt, agrees to stop the alleged activity if the government drops the charges

Per Se Illegal

In antitrust law, business practices that are deemed illegal, regardless of their economic rationale or their consequences

Rule of Reason

Before ruling on the legality of certain business practices, a court examines why they were undertaken and what effect they have on market competition

Predatory Pricing

Pricing tactics employed by a dominant firm to drive competitors out of business, such as temporarily selling below marginal cost or dropping the prices only in certain markets

Conglomerate Merger

A merger of firms in different industries

Economics

Study of how people use their scarce resources to satisfy their unlimited wants

Resources

Inputs or factors of production, used to produce the goods and services that people want; consisting of labor capital, natural resources, and entrepreneurial ability

Labor

Physical and mental effort used to produce goods and services

Capital

Buildings, equipment, human skills used to produce goods and services

Natural Resources

Gifts of nature used to produce goods and services

Entrepreneurial Ability

Imagination required to develop a new product or process, the skill needed to organize production and willingness to stake the risk of profit or loss

Entrepreneur

A profit-seeking decision maker who starts with an idea, organizes an enterprise to bring that idea to life, and assumes the risk of the operation

Wages

Payment to resource owners for their labor

Intrest

Payment to resource owners for their capital

Rent

Payment for use of their natural resources

Profit

Reward for entrepreneurial ability sales minus resource cost

Good

A tangible product

Service

An activity or intangible product used to satisfy human want

Scarcity

Occurs when desire exceeds amount available

Market

A set of arrangements buyers and sellers carry out, exchange at mutually agreeable terms

Product Market

A market in which a good or service is bought or sold

Resource Market

A market in which a resource is bought or sold

Circular Flow Model

A diagram that traces the flow of resources, products, income and revenue among economic decision makers

Rational Self-interest

Each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit

Marginal

Incremental, additional, or extra; used to describe a change in an economic variable (increase by 1 unit, +1)

Microeconomics

Study of the economic behavior in particular markets, such as that for computers or unskilled labor

Macroeconomics

Study of the economic behavior of entire economies, as measured by production and employment

Economic Fluctuations

Rise and fall of economic activity relative to the long-term growth trend of the economy(business cycle)

Economic Theory Model

A simplification of reality used to make predictions about cause and effect in the real world

Variable

A measure, such as price or quantity, that can take on different values at different times

Other-things-constant assumption

The assumption, when focusing on the relation among key economic variables, that other variables remain unchanged

Ceteris Paribus

All other things constant

Behavioral Assumption

An assumption that describes the expected behavior of economic decision makers

Hypothesis

A theory about how key variables relate to each other

Positive Economic Statment

A statement that can be proved or disproved by reference to facts

Normative Economic Statement

A statement that reflects on opinion, which can be proved or disproved by reference to facts

Association is Causation Fallacy

Incorrect idea that if two variables are associated in time, one must cause the other

Fallacy of Composition

The incorrect belief that what is true for one individual, or part, must be true for the whole

Secondary Effects

Unintended Consequences of economic actions that may develop slowly over time

Opportunity Cost

The value of the best alternative forgone when an item or activity is chosen

Sunk Cost

A cost that has already been incurred in the past, cannot be recovered, and thus is irrelevant for the present and future economic decisions

Law of Comparative Advantage

The individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good

David Ricardo

Father of modern international trade, and father of comparative advantage

Absolute Advantage

The ability to produce something using fewer resources than other producers use

Comparative Advantage

The ability to produce something at a lower opportunity cost than other producers face

Barter

The direct exchange of one good for another without using money

Medium of exchange

anything that is generally accepted as a standard of value and a measure of wealth in a particular country or region

Division of Labor

organizing production of a good into its seperate tasks

Specialization of Labor

Focusing work effort on a particular product or a single task

Production Possibilities Frontier (PPF)

A curve showing the alternative combinations of goods that can be produced when available resources are used fully and efficiently

Efficiency

The condition that exists when there is no way resources can be reallocated to increase the production of one good without decreasing the production of another good

Law of increasing Opportunity Cost

To produce each additional increment of a good, a larger increment of an alternative good must be sacrificed if the economy's resources are already being used efficiently

Economic Growth

An increase in the economies ability to produce goods and services; an upward shift of the PPF

Pure Capitalism (Democracy)

An economic system characterized by the private ownership of resources and the use of prices to coordinate economic activity in unregulated markets

Private Property Rights

An owners right to use, rent or sell resources or property

Mixed System (socialism)

An economic system characterized by the private ownership of some resources and the public ownership of other resources, some markets are unregulated and others are regulated

Pure Command System (North Korea)

An economic system characterized by the public ownership resources and centralized planning

Benthem utilitarianism

Bentham, father of utilitarianism

Convergence Theory

Idea or belief all countries will end up with a middle economy (socialism)

Utility

The satisfaction or sense of well being received from consumption

Transfer Payments

Cash or in-kind benefits given to individuals as outright grants from the government

Industrial Revolution

Developments of large scale factory production that began in Great Britian around 1750 and spread to the rest of Europe

Firms

Economic units formed by profit seeking entrepreneurs who use resources to produce goods and services for sale

Sole Proprietorship

A firm with a single owner who has the right to all profits and who bears unlimited liability for the firm debts

Partnership

A firm with multiple owners who share the firm's profits and bear unlimited liability for the firm's debts

Corporation

A legal entity by stockholders whose liability is limited to the value of their stock

A Realized Capital Gain

Any increase in the market value of a share that occurs between the time that the share is purchased and the time it is sold

Cooperative

An organization of people who pull their resources to buy and sell more efficiently than they could individually