Economics II Final Exam Comprehensive Study Guide

Comprehensive vocabulary flashcards covering Microeconomics topics including Oligopoly, Resource Markets, Wage Determination, Antitrust Policy, Agriculture, Income Distribution, and Public Finance.

Oligopoly

A market structure characterized by a small number of large firms, significant barriers to entry, and mutual interdependence among firms.

Mutual Interdependence

A condition in oligopoly where each firm watches its rivals closely and considers their likely reactions before making pricing or output decisions.

Kinked Demand Curve

A model explaining why oligopoly prices tend to be sticky; it assumes rivals will match price cuts but ignore price increases, making demand elastic above the current price and inelastic below it.

Sticky Prices

The tendency of prices in oligopoly to remain inflexible even when costs change moderately, often explained by the broken marginal revenue curve.

Horizontal Merger

A combination of two direct competitors in the same market, such as Exxon and Mobil; this type of merger is the most likely to be challenged by antitrust authorities.

Vertical Merger

A combination of two firms at different stages of the same supply chain, such as a car manufacturer buying a tire company.

Conglomerate Merger

A combination of two firms in unrelated or different markets, such as Amazon buying a movie studio; these are the least likely to be challenged by antitrust authorities.

Collusion

A practice where firms secretly cooperate to restrict output, raise prices, and divide markets to act like a shared monopoly.

Cartel

A formal, explicit agreement between firms to coordinate prices and production, such as OPEC.

Predatory Pricing

An exclusionary practice where a firm sets prices below cost to drive rivals out of the market, intending to raise prices once competition is eliminated.

Tying Contracts

A practice where a producer forces a customer to buy Product B as a condition of purchasing Product A.

Exclusive Dealing

A contract requiring a retailer or supplier to do business only with one firm, effectively blocking rivals from distribution channels.

Derived Demand

The principle that the demand for a resource comes from the demand for the final product that the resource helps produce.

Marginal Resource Cost (MRC)

The extra cost of employing one more unit of a resource, calculated as $\frac{\Delta TC}{\Delta Q_{\text{Resource}}}$.

Marginal Revenue Product (MRP)

The extra revenue generated by hiring one more unit of a resource, calculated as $\Delta TR / \Delta L$ or $MP \times P$.

Profit-Maximizing Hiring Rule

The rule stating that a firm should hire additional workers as long as $MRP > MRC$ and stop where $MRP = MRC$.

Monopsony

A labor market where there is only one buyer or employer, giving that employer the power to set wages.

Monopsonistic Exploitation

The difference between a worker's $MRP$ and the lower wage paid by a monopsonist, represented by the formula $MRP - \text{Wage}$.

Nominal Wage

The dollar amount of wages paid to a worker, representing the number on their paycheck without adjustment for inflation.

Real Wage

The nominal wage adjusted for inflation, measuring the actual purchasing power of the earnings.

Human Capital

Investment in oneself through education, on-the-job training, and job experience that increases productivity and earning power.

Occupational Licensing

Government or industry-required certifications to practice a profession that act as a barrier to entry, restricting labor supply and keeping wages higher.

Sherman Antitrust Act ($1890$)

The foundational U.S. antitrust law where $\S 1$ prohibits collusion and restraint of trade, and $\S 2$ prohibits monopolization.

Clayton Act ($1914$)

Antitrust legislation that addresses price discrimination, exclusive dealing, tying contracts, and anticompetitive mergers.

Per Se Rule

A legal standard where certain conduct, such as price-fixing or cartels, is automatically illegal regardless of context or justification.

Rule of Reason

A legal approach where courts analyze the full context of a business practice to weigh its pro-competitive benefits against its anti-competitive harms.

Munn v. Illinois ($1877$)

A Supreme Court case establishing the government's right to regulate private industries 'affected with public interest'.

Natural Monopoly

An industry where one firm can supply the entire market at a lower cost than multiple firms due to continuously declining long-run average total cost.

Fair Return Price

A regulatory pricing rule where price is set at average total cost ($P = ATC$), allowing a firm to earn a normal profit.

Socially Optimal Price

A regulatory pricing rule where price is set at marginal cost ($P = MC$) for maximum efficiency, though it may result in losses for a natural monopoly.

Regulatory Capture

A situation where a regulatory agency starts serving the interests of the industry it regulates rather than the public interest.

Income

A flow of money received over a period of time, such as wages, salaries, dividends, and rent.

Wealth

A stock representing the total value of assets owned at a point in time, such as stocks, bonds, and real estate.

Lorenz Curve

A graphical representation of income inequality that plots the cumulative percentage of population against the cumulative percentage of income received.

Gini Coefficient

A numerical measure of inequality ranging from $0$ (perfect equality) to $1$ (perfect inequality).

Great Gatsby Curve

An empirical relationship showing that countries with high income inequality tend to have low intergenerational income mobility.

Taste for Discrimination

An irrational preference by an employer to discriminate against qualified workers based on personal prejudice, which increases the firm's costs.

Statistical Discrimination

The practice of making decisions based on group averages or stereotypes rather than individual ability due to imperfect information.

Progressive Tax

A tax structure where the tax rate rises as income rises, such as the federal income tax.

Regressive Tax

A tax structure where the effective tax rate falls as income rises, such as sales taxes or payroll taxes above the wage cap.

Proportional Tax

A tax structure where everyone pays the same percentage of income regardless of their income level; also known as a flat tax.

Tax Incidence

The study of who actually bears the economic burden of a tax, which depends on the price elasticities of supply and demand.

Entitlement Program

A government program, like Social Security or Medicare, available to anyone meeting eligibility criteria such as age or work history, regardless of current income.

Means-Tested Program

A public assistance program, like Medicaid or SNAP, available only to individuals whose income or assets fall below a specific threshold.