AP Microeconomics MONDO REVIEW - Assignment Essays %

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business cycle

answer

the alternation between economic downturns, known as recessions, and economic upturns, known as expansions.

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recession

answer

a period of economic downturn when output and employment are falling.

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expansion

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a period of economic upturn in which output and employment are rising; also referred to as recovery.

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depression

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a very deep and prolonged economic downturn.

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employment

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the number of people who are currently working for pay in the economy.

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unemployment

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the number of people who are actively looking for work but aren't currently employed.

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labor force

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the number of people who are either currently holding a job (full time or part time) in the economy or are actively looking for work but aren't currently employed; the sum of employment and unemployment.

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unemployment rate

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the percentage of the labor force that is unemployed.

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output

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the quantity of goods and services produced.

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aggregate output

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the economy's total production of goods and services for a given time period.

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inflation

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a rising overall price level.

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deflation

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a falling overall price level.

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price stability

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when the overall price level is changing only slowly if at all.

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economic growth

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an increase in the maximum amount of goods and services an economy can produce.

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model

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a simplified representation used to better understand a real-life situation.

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other things equal assumption

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in the development of a model, the assumption that all other relevant factors remain unchanged; also known as the ceteris paribus assumption.

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economics

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the study of scarcity and choice.

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individual choice

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decisions by individuals about what to do, which necessarily involve decisions about what not to do.

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economy

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a system for coordinating a society's productive and consumptive activities.

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market economy

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an economy in which the decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement in the decisions.

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command economy

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an economy in which industry is publicly owned and a central authority makes production and consumption decisions.

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incentives

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rewards or punishments that motivate particular choices.

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property rights

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establish ownership and grant individuals the right to trade goods and services with each other.

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marginal analysis

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the study of the costs and benefits of doing alittle bit more of an activity versus a little bit less.

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resource

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anything that can be used to produce something else.

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land

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all resources that come from nature, such as minerals, timber, and petroleum.

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labor

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the effort of workers.

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capital

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manufactured goods used to make other goods and services; also called "physical capital."

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entrepreneurship

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the efforts of entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovating to develop new products and production processes.

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scarce

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in short supply; when a resource is not available in sufficient quantities to satisfy all the various ways a society wants to use it.

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opportunity cost

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the real cost of an item: the value of the next best alternative that you must give up in order to get that item.

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microeconomics

answer

the branch of economics that studies how individuals, households, and firms make decisions and how those decisions interact.

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macroeconomics

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the branch of economics that is concerned with the overall ups and downs of the economy.

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economic aggregates

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economic measures that summarize data across many different markets.

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positive economics

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the branch of economic analysis that describes the way the economy actually works.

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normative economics

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the branch of economic analysis that makes prescriptions about the way the economy should work.

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trade-off

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when you give up something in order to have something else.

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production possibilities curve (PPC)

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illustrates the trade-offs facing an economy that produces only two goods; shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced.

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efficient

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describes a market or economy in which there is no way to make anyone better off without making at least one person worse off.

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productive efficiency

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achieved by an economy if it produces at a point on its production possibilities curve.

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allocative efficiency

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achieved by an economy if it produces at the point along its production possibilities curve that makes consumers as well off as possible.

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technology

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the technical means for producing goods and services.

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specialization

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situation in which each person specializes in the task that he or she is good at performing.

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trade

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when, in a market economy, individuals provide goods and services to others and receive goods and services in return.

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gains from trade

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an economic principle that states that people can get more of what they want through trade than they could if they tried to be self-sufficient; this increase in output is due to specialization.

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specialization

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situation in which each person specializes in the task that he or she is good at performing.

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comparative advantage

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the advantage conferred by an individual if the opportunity cost of producing the good or service is lower for that individual than for other people.

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absolute advantage

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the advantage conferred by the ability to produce more of a good or service with a given amount of time and resources; different from comparative advantage.

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terms of trade

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indicate the rate at which one good can be exchanged for another.

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competitive market

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A market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold.

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supply and demand model

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A model of how a competitive market works.

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demand schedule

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Shows how much of a good or service consumers will be willing and able to buy at different prices.

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quantity demanded

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Is the actual amount of a good or service consumers are willing and able to buy at some specific price. It is shown as a single point in a demand schedule or along a demand curve.

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demand curve

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A graphical representation of the demand schedule. It shows the relationship between quantity demanded and price.

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law of demand

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Says that a higher price for a good or service, all other things being equal, leads people to demand a smaller quantity of that good or service.

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change in demand

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Is a shift of the demand curve, which changes the quantity demanded at any given price.

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movement along the demand curve

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A change in the quantity demanded of a good that is the result of a change in that good's price.

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substitutes

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If a rise in the price of one of the goods leads to an increase in the demand for the other good.

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complements

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A rise in the price of one of the goods leads to a decrease in the demand for the other good.

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normal good

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When a rise in income increases the demand for a good—the normal case.

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inferior good

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When a rise in income decreases the demand for a good.

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individual demand curve

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Illustrates the relationship between quantity demanded and price for an individual consumer.

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quantity supplied

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The actual amount of a good or service people are willing to sell at some specific price.

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supply schedule

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Shows how much of a good or service producers would supply at different prices.

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supply curve

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Shows the relationship between the quantity supplied and the price.

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law of supply

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Says that, other things being equal, the price and quantity supplied of a good are positively related.

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change in supply

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Is a shift of the supply curve, which changes the quantity supplied at any given price.

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movement along the supply curve

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Is a change in the quantity supplied of a good arising from a change in the good's price.

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input

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Is a good or service that is used to produce another good or service.

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individual supply curve

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Illustrates the relationship between quantity supplied and price for an individual producer.

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equilibrium

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An economic situation when no individual would be better off doing something different.

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equilibrium price

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When the price has moved to a level at which the quantity demanded of a good equals the quantity supplied of that good. Also referred to as the market-clearing price.

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equilibrium quantity

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The quantity of the good bought and sold at the equilibrium price.

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surplus

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When the quantity supplied exceeds the quantity demanded.

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shortage

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When the quantity demanded exceeds the quantity supplied.

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price controls

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Legal restrictions on how high or low a market price may go.

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price ceiling

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A maximum price sellers are allowed to charge for a good or service.

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price floor

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A minimum price buyers are required to pay for a good or service.

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inefficient allocation to consumers

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People who want the good badly and are willing to pay a high price don't get it, and those who care relatively little about the good and are only willing to pay a relatively low price do get it.

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wasted resources

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People expend money, effort, and time to cope with the shortages caused by the price ceiling.

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inefficiently low quality

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Sellers offer low quality goods at a low price even though buyers would prefer a higher quality at a higher price.

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black market

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A market in which goods or services are bought and sold illegally—either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling.

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minimum wage

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A legal floor on the hourly wage rate paid for a worker's labor.

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inefficient allocation of sales among sellers

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Those who would be willing to sell the good at the lowest price are not always those who manage to sell it.

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inefficiently high quality

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Sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price.

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quantity control or quota

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Is an upper limit on the quantity of some good that can be bought or sold.

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license

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Gives its owner the right to supply a good or service.

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demand price

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The price at which consumers will demand that quantity.

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supply price

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The price at which producers will supply that quantity.

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wedge

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The price paid by buyers ends up being higher than that received by sellers.

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quota rent

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The earnings that accrue to the license-holder from ownership of the right to sell the good. It is equal to the market price of the license when the licenses are traded.

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deadweight loss

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The value of forgone mutually beneficial transactions.

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substitution effect

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the change in the quantity of a good demanded as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive.

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income effect

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the change in the quantity of a good demanded that results from a change in the consumer's purchasing power when the price of the good changes.

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price elasticity of demand

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the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve (dropping the minus sign).

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midpoint method

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a technique for calculating the percent change by dividing the change in a variable by the average, or midpoint, of the initial and final values of that variable.

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perfectly inelastic demand

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when the quantity demanded does not respond at all to changes in the price; when demand is perfectly inelastic, the demand curve is a vertical line.

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perfectly elastic demand

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when any price increase will cause the quantity demanded to drop to zero; when demand is perfectly elastic, the demand curve is a horizontal line.

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elastic demand

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when the price elasticity of demand is greater than 1.

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inelastic demand

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when the price elasticity of demand is less than 1.

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unit-elastic demand

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when the price elasticity of demand is exactly 1.

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total revenue

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the total value of sales of a good or service; equal to the price multiplied by the quantity sold.

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cross-price elasticity of demand

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(between two goods) measures the effect of the change in one good's price on the quantity demanded of another good; is equal to the percent change in the quantity demanded of one good divided by the percent change in the other good's price.

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income elasticity of demand

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the percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in the consumer's income; it measures how changes in income affect the demand for a good.

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income-elastic demand

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when the income elasticity of demand for a good is greater than 1.

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income-inelastic demand

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when the income elasticity of demand for a good is positive but less than 1.

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price elasticity of supply

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a measure of the responsiveness of the quantity of a good supplied to changes in the price of that good; the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve.

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perfectly inelastic supply

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when the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied; a perfectly inelastic supply curve is a vertical line.

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perfectly elastic supply

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when the quantity supplied is zero below some price and approaches infinity above that price; a perfectly elastic supply curve is a horizontal line.

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willingness to pay

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the maximum price at which a consumer would buy a good.

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individual consumer surplus

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the net gain to an individual buyer from the purchase of a good; equal to the difference between the buyer's willingness to pay and the price paid.

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total consumer surplus

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the sum of the individual consumer surpluses of all the buyers of a good in a market.

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consumer surplus

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the net gain received from purchasing a good or service; often used to refer to both individual consumer surplus and total consumer surplus.

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cost

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the lowest price at which a seller is willing to sell a good.

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individual producer surplus

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the net gain to an individual seller from selling a good; equal to the difference between the price received and the seller's cost.

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total producer surplus

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the sum of the individual producer surpluses of all the sellers of a good in a market.

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producer surplus

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refers to both individual and total producer surplus.

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total surplus

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the total net gain to consumers and producers from trading in a market; the sum of consumer surplus and producer surplus.

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progressive tax

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a tax that rises more than in proportion to income.

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regressive tax

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a tax that rises less than in proportion to income.

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proportional tax

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a tax that rises in proportion to income.

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excise tax

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a tax on sales of a particular good or service.

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tax incidence

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the distribution of the tax burden.

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deadweight loss

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the value of foregone mutually beneficial transactions; (from a tax) the decrease in total surplus resulting from the tax, minus the tax revenues generated.

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administrative costs

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(of a tax) the resources used by the government to collect the tax, and by taxpayers to pay (or to evade) it, over and above the amount collected.

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lump-sum tax

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a tax of a fixed amount paid by all taxpayers, independent of the taxpayer's income.

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utility

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a measure of personal satisfaction.

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util

answer

a unit of utility.

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marginal utility

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

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principle of diminishing marginal utility

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states that each successive unit of a good or service consumed adds less to total utility than does the previous unit.

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marginal utility curve

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shows how marginal utility depends on the quantity of a good or service consumed.

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budget constraint

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limits the cost of a consumer's consumption bundle to no more than the consumer's income.

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consumption possibilities

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the set of all consumption bundles that are affordable, given a consumer's income and prevailing prices.

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budget line (BL)

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shows the consumption bundles available to a consumer who spends all of his or her income.

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optimal consumption bundle

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the consumption bundle that maximizes the consumer's total utility given his or her budget constraint.

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optimal consumption rule

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says that in order to maximize utility, a consumer must equate the marginal utility per dollar spent on each good and service in the consumption bundle.

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marginal utility per dollar

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the additional utility from spending one more dollar on a good or service.

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explicit cost

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a cost that involves actually laying out money.

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implicit cost

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

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economic profit

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a business's total revenue minus the opportunity cost of its resources; usually less than the accounting profit.

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implicit cost of capital

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the opportunity cost of the capital used by a business—the income the owner could have realized from that capital if it had been used in its next best alternative way.

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accounting profit

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a business's total revenue minus the explicit cost and depreciation.

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normal profit

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an economic profit equal to zero; an economic profit just high enough to keep a firm engaged in its current activity.

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optimal output rule

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says that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

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marginal revenue curve

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shows how marginal revenue varies as output varies.

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marginal revenue

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the change in total revenue generated by an additional unit of output.

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marginal cost curve

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shows how the cost of producing one more unit depends on the quantity that has already been produced.

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principle of marginal analysis

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says that every activity should continue until marginal benefit equals marginal cost.

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production function

answer

the relationship between the quantity of inputs a firm uses and the quantity of output it produces.

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short run

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the time period in which at least one input is fixed.

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fixed input

answer

an input whose quantity is fixed for a period of time and cannot be varied.

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variable input

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an input whose quantity the firm can vary at any time.

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long run

answer

the time period in which all inputs can be varied.

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total product curve

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shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.

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marginal product

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the additional quantity of output produced by using one more unit of an input.

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diminishing returns to an input

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when an increase in the quantity of an input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.

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total cost (TC)

answer

the sum of the fixed cost and the variable cost of producing a given quantity of output.

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total cost curve

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shows how total cost depends on the quantity of output.

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fixed cost (FC)

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a cost that does not depend on the quantity of output produced; the cost of the fixed input.

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variable cost (VC)

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a cost that depends on the quantity of output produced; the cost of the variable input.

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average total cost (ATC)

answer

total cost divided by quantity of output produced; also known as average cost.

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U-shaped average total cost curve

answer

falls at low levels of output and then rises at higher levels.

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average fixed cost (AFC)

answer

the fixed cost per unit of output.

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average variable cost (AVC)

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the variable cost per unit of output.

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minimum-cost output

answer

the quantity of output at which average total cost is lowest; corresponds to the bottom of the U-shaped average total cost curve.

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average product

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the total product divided by the quantity of an input.

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average product curve

answer

shows the relationship between the average product and the quantity of an input.

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long-run average total cost curve (LRATC)

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shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output.

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minimum efficient scale

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the smallest quantity at which a firm's long-run average total costs is minimized.

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economies of scale

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when long-run average total cost declines as output increases.

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diseconomies of scale

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when long-run average total cost increases as output increases.

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increasing returns to scale

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when output increases more than in proportion to an increase in all inputs; for example, doubling all inputs would cause output to more than double.

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decreasing returns to scale

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when output increases less than in proportion to an increase in all inputs.

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constant returns to scale

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when output increases directly in proportion to an increase in all inputs.

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sunk cost

answer

a cost that has already been incurred and is nonrecoverable; should be ignored in a decision about future actions.

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perfectly competitive market

answer

a market in which all market participants are price takers.

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price-taking firm

answer

a firm whose actions have no effect on the market price of the good or service it sells.

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price-taking consumer

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a consumer whose actions have no effect on the market price of the good or service he or she buys.

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perfectly competitive industry

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an industry in which firms are price takers.

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market share

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the fraction of the total industry output accounted for by a given firm's output.

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standardized product

answer

describes a good produced by different firms, but that consumers regard as the same good; also known as a commodity.

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free entry and exit

answer

when new firms can easily enter into an industry and existing firms can easily leave that industry.

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monopolist

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the only producer of a good that has no close substitutes.

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monopoly

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an industry controlled by a monopolist.

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barrier to entry

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protects a monopolist (and allows it to persist and earn economic profits) by preventing other firms from entering the industry.

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natural monopoly

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when economies of scale provide a large cost advantage to a single firm that produces all of an industry's output.

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patent

answer

gives an inventor a temporary monopoly in the use or sale of an invention.

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answer

gives the copyright holder for a literary or artistic work the sole right to profit from that work for a specified period of time.

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oligopoly

answer

an industry with only a small number of firms.

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oligopolist

answer

a producer in an oligopoly.

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imperfect competition

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industry in which no one firm has a monopoly, but producers nonetheless realize that they can affect market prices.

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monopolistic competition

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market structure in which there are many competing firms in an industry, each firm sells a differentiated product, and there is free entry into and exit from the industry in the long run.

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concentration ratios

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measure of the percentage of industry sales accounted for by the "X" largest firms; for example, the four-firm concentration ratio or the eight-firm concentration ratio.

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Herfindahl-Hirschman Index (HHI)

answer

the square of each firm's share of market sales summed over the industry; gives a picture of the industry market structure.

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price-taking firm's optimal output rule

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says that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced.

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break-even price

answer

the market price at which a price-taking firm earns zero profit; the minimum average total cost of such a firm.

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shut-down price

answer

the price at which a firm ceases production in the short run; equal to minimum average variable cost.

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short-run firm supply curve

answer

shows how an individual firm's profitmaximizing level of output depends on the market price, taking the fixed cost as given.

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industry supply curve

answer

shows the relationship between the price of a good and the total output of the industry as a whole; also known as market supply curve.

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short-run industry supply curve

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shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms.

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long-run industry supply curve

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shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry.

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long-run market equilibrium

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when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur.

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constant-cost industry

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an industry with a horizontal (perfectly elastic) long-run supply curve; the firms' cost curves are unaffected by changes in the size of the industry.

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increasing-cost industry

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an industry with an upward-sloping longrun supply curve; the firms' production costs increase with the size of the industry.

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decreasing-cost industry

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an industry with a downward-sloping long-run supply curve; the firms' production costs decrease as the industry grows.

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public ownership

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(of a monopoly) when a good is supplied by the government, or by a firm owned by the government, instead of by a monopolist.

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price regulation

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limits the price that a monopolist is allowed to charge.

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single-price monopolist

answer

firm that charges all consumers the same price.

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price discrimination

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when firms charge different prices to different consumers for the same good.

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perfect price discrimination

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when a monopolist charges each consumer his or her willingness to pay—the maximum that the consumer is willing to pay.

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interdependence

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when the outcome (profit) of each firm depends on the actions of the other firms in the market.

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duopoly

answer

an oligopoly consisting of only two firms.

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duopolist

answer

each of the two firms in a duopoly.

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cartel

answer

a group of producers that agree to restrict output in order to increase prices and their joint profits.

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collusion

answer

when sellers cooperate to raise their joint profits.

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noncooperative behavior

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when firms act in their own self-interest, ignoring the effects of their actions on each other's profits.

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game theory

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the study of behavior in situations of interdependence.

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payoff

answer

the reward received by a player in a game, such as the profit earned by an oligopolist.

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payoff matrix

answer

shows how the payoff to each of the participants in a two-player game depends on the actions of both. Such a matrix helps us analyze situations of interdependence.

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dominant strategy

answer

a player's best action regardless of the action taken by the other player.

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prisoners' dilemma

answer

a game based on two premises: (1) each player has an incentive to choose an action that benefits itself at the other player's expense; and (2) when both players follow this incentive, both are worse off than if they had acted cooperatively.

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Nash equilibrium

answer

the result when each player in a game chooses the action that maximizes his or her payoff, given the actions of other players; also called noncooperative equilibrium.

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noncooperative equilibrium

answer

see "Nash equilibrium."

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strategic behavior

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when a firm attempts to influence the future behavior of other firms.

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tit for tat

answer

a strategy that involves playing cooperatively at first, then doing whatever the other player did in the previous period.

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tacit collusion

answer

when firms limit production and raise prices in a way that raises each other's profits, even though they have not made any formal agreement.

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antitrust policy

answer

involves efforts by the government to prevent oligopolistic industries from becoming or behaving like monopolies.

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price war

answer

when tacit collusion breaks down and aggressive price competition causes prices to collapse.

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product differentiation

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an attempt by a firm to convince buyers that its product is different from the products of other firms in the industry.

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price leadership

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one firm sets its price first, and other firms then follow.

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nonprice competition

answer

when firms that have a tacit understanding not to compete on price use advertising and other means to try to increase their sales.

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excess capacity

answer

when firms in a monopolistically competitive industry produce less than the output at which average total cost is minimized.

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brand name

answer

a name owned by a particular firm that distinguishes its products from those of other firms.

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physical capital

answer

often referred to simply as capital—consists of manufactured (human-made) productive resources, such as equipment, buildings, tools, and machines, used to produce other goods and services.

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human capital

answer

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

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factor distribution of income

answer

the division of total income among land, labor, capital, and entrepreneurship.

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marginal revenue product

answer

the additional revenue generated by employing one more unit of a factor.

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marginal revenue product curve

answer

shows how the marginal revenue product of a factor depends on the quantity of that factor employed.

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derived demand

answer

demand for a factor is a derived demand because it results from (that is, it is derived from) the demand for the output being produced.

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equilibrium marginal revenue product

answer

the additional revenue generated by the last unit of a factor employed in the factor market as a whole.

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rental rate

answer

the cost, explicit or implicit, of using a unit of an asset, either land or capital, for a given period of time.

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marginal productivity theory of income distribution

answer

states that every factor of production is paid the equilibrium marginal revenue product.

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economic rent

answer

the payment to a factor of production in excess of the minimum payment necessary to employ that factor.

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leisure

answer

the time available for purposes other than earning money to buy marketed goods.

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individual labor supply curve

answer

shows how the quantity of labor supplied by an individual depends on that individual's wage rate.

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marginal factor cost

answer

the additional cost of employing an additional unit of a factor of production.

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monopsonist

answer

a single buyer in a factor market.

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monopsony

answer

a market in which there is a monopsonist.

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cost-minimization rule

answer

employ factors so that the marginal product per dollar spent on each factor is the same; this rule is used by a firm to determine the cost-minimizing combination of inputs.

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compensating differentials

answer

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

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unions

answer

organizations of workers that try to raise wages and improve working conditions for their members by bargaining collectively.

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efficiency wages

answer

wages that exceed the market equilibrium wage rate; employers use efficiency wages to motivate hard work and reduce worker turnover.

question

socially optimal quantity

answer

the quantity that society would choose if all the costs and benefits of pollution were fully accounted for.

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marginal social cost

answer

the additional cost imposed on society as a whole by one additional unit.

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marginal social benefit

answer

the additional gain to society as a whole from an additional unit.

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external cost

answer

an uncompensated cost that an individual or a firm imposes on others.

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external benefit

answer

a benefit that an individual or a firm confers on others without receiving compensation.

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externalities

answer

external costs and external benefits.

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negative externalities

answer

external costs.

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positive externalities

answer

external benefits.

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market failure

answer

when the outcome in a market is ineffective.

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Coase theorem

answer

states that payment between private parties can achieve an efficient solution to externality problems as long as transaction costs are sufficiently low.

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internalize the externalities

answer

when individuals take external costs or external benefits into account, they internalize the externalities.

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transaction costs

answer

the costs to individuals of making a deal.

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environmental standards

answer

rules that protect the environment by specifying limits for or actions by producers and consumers.

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tradable emissions permits

answer

licenses to emit limited quantities of pollutants that can be bought and sold by polluters.

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technology spillover

answer

an external benefit that results when new technological knowledge spreads among firms.

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marginal private benefit

answer

the marginal benefit that accrues to consumers of the good, not including any external benefits.

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marginal external benefit

answer

the addition to external benefits created by one more unit of the good.

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Pigouvian subsidy

answer

a payment designed to correct for the effects of external benefits.

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marginal private cost

answer

the marginal cost of producing the good, not including any external costs.

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marginal external cost

answer

the increase in external costs to society created by one more unit of the good.

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Pigouvian taxes

answer

taxes designed to correct for the effects of external costs.

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network externality

answer

when the value of a good to an individual depends on how many people also use the good.

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excludable

answer

a good is excludable if the supplier of that good can prevent people who do not pay from consuming it.

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rival in consumption

answer

a good is rival in consumption if the same unit of the good cannot be consumed by more than one person at the same time.

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private good

answer

a good that is both excludable and rival in consumption.

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nonexcludable

answer

when a good is nonexcludable, the supplier cannot prevent consumption by people who do not pay for it.

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nonrival in consumption

answer

a good is nonrival in consumption if more than one person can consume the same unit of the good at the same time.

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free-rider problem

answer

goods that are nonexcludable suffer from the free-rider problem. Individuals have no incentive to pay for their own consumption and instead will take a "free ride" on anyone who does pay.

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public good

answer

both nonexcludable and nonrival in consumption.

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common resource

answer

nonexcludable and rival in consumption; you can't stop others from consuming the good, and when they consume it, less of the good is available for you.

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overuse

answer

the depletion of a common resource that occurs when individuals ignore the fact that their use depletes the amount of the resource remaining for others.

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artificially scarce good

answer

a good that is excludable but nonrival in consumption.

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marginal cost pricing

answer

occurs when regulators set a monopoly's price equal to its marginal cost to achieve efficiency.

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average cost pricing

answer

occurs when regulators set a monopoly's price equal to its average cost to prevent the firm from incurring a loss.

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poverty threshold

answer

the annual income below which a family is officially considered poor.

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poverty rate

answer

the percentage of the population with incomes below the poverty threshold.

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median household income

answer

the income of the household lying in the middle of the income distribution.

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mean household income

answer

the average income across all households.

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Lorenz curve

answer

shows the percentage of all income received by the poorest members of the population, from the poorest 0% to the poorest 100%.

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Gini coefficient

answer

a number that summarizes a country's level of income inequality based on how unequally income is distributed.

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means-tested program

answer

program available only to individuals or families whose incomes fall below a certain level.

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in-kind benefit

answer

a benefit given in the form of goods or services.

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negative income tax

answer

a program that supplements the income of low-income workers.

1 of 295

question

business cycle

answer

the alternation between economic downturns, known as recessions, and economic upturns, known as expansions.

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recession

answer

a period of economic downturn when output and employment are falling.

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expansion

answer

a period of economic upturn in which output and employment are rising; also referred to as recovery.

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depression

answer

a very deep and prolonged economic downturn.

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employment

answer

the number of people who are currently working for pay in the economy.

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unemployment

answer

the number of people who are actively looking for work but aren't currently employed.

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labor force

answer

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unemployment rate

answer

the percentage of the labor force that is unemployed.

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output

answer

the quantity of goods and services produced.

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aggregate output

answer

the economy's total production of goods and services for a given time period.

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inflation

answer

a rising overall price level.

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deflation

answer

a falling overall price level.

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price stability

answer

when the overall price level is changing only slowly if at all.

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economic growth

answer

an increase in the maximum amount of goods and services an economy can produce.

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model

answer

a simplified representation used to better understand a real-life situation.

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other things equal assumption

answer

in the development of a model, the assumption that all other relevant factors remain unchanged; also known as the ceteris paribus assumption.

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economics

answer

the study of scarcity and choice.

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individual choice

answer

decisions by individuals about what to do, which necessarily involve decisions about what not to do.

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economy

answer

a system for coordinating a society's productive and consumptive activities.

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market economy

answer

an economy in which the decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement in the decisions.

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command economy

answer

an economy in which industry is publicly owned and a central authority makes production and consumption decisions.

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incentives

answer

rewards or punishments that motivate particular choices.

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property rights

answer

establish ownership and grant individuals the right to trade goods and services with each other.

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marginal analysis

answer

the study of the costs and benefits of doing alittle bit more of an activity versus a little bit less.

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resource

answer

anything that can be used to produce something else.

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land

answer

all resources that come from nature, such as minerals, timber, and petroleum.

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labor

answer

the effort of workers.

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capital

answer

manufactured goods used to make other goods and services; also called "physical capital."

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entrepreneurship

answer

the efforts of entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovating to develop new products and production processes.

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scarce

answer

in short supply; when a resource is not available in sufficient quantities to satisfy all the various ways a society wants to use it.

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opportunity cost

answer

the real cost of an item: the value of the next best alternative that you must give up in order to get that item.

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microeconomics

answer

the branch of economics that studies how individuals, households, and firms make decisions and how those decisions interact.

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macroeconomics

answer

the branch of economics that is concerned with the overall ups and downs of the economy.

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economic aggregates

answer

economic measures that summarize data across many different markets.

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positive economics

answer

the branch of economic analysis that describes the way the economy actually works.

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normative economics

answer

the branch of economic analysis that makes prescriptions about the way the economy should work.

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trade-off

answer

when you give up something in order to have something else.

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production possibilities curve (PPC)

answer

illustrates the trade-offs facing an economy that produces only two goods; shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced.

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efficient

answer

describes a market or economy in which there is no way to make anyone better off without making at least one person worse off.

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productive efficiency

answer

achieved by an economy if it produces at a point on its production possibilities curve.

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allocative efficiency

answer

achieved by an economy if it produces at the point along its production possibilities curve that makes consumers as well off as possible.

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technology

answer

the technical means for producing goods and services.

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specialization

answer

situation in which each person specializes in the task that he or she is good at performing.

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trade

answer

when, in a market economy, individuals provide goods and services to others and receive goods and services in return.

question

gains from trade

answer

an economic principle that states that people can get more of what they want through trade than they could if they tried to be self-sufficient; this increase in output is due to specialization.

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specialization

answer

situation in which each person specializes in the task that he or she is good at performing.

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comparative advantage

answer

the advantage conferred by an individual if the opportunity cost of producing the good or service is lower for that individual than for other people.

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absolute advantage

answer

the advantage conferred by the ability to produce more of a good or service with a given amount of time and resources; different from comparative advantage.

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terms of trade

answer

indicate the rate at which one good can be exchanged for another.

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competitive market

answer

A market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold.

question

supply and demand model

answer

A model of how a competitive market works.

question

demand schedule

answer

Shows how much of a good or service consumers will be willing and able to buy at different prices.

question

quantity demanded

answer

Is the actual amount of a good or service consumers are willing and able to buy at some specific price. It is shown as a single point in a demand schedule or along a demand curve.

question

demand curve

answer

A graphical representation of the demand schedule. It shows the relationship between quantity demanded and price.

question

law of demand

answer

Says that a higher price for a good or service, all other things being equal, leads people to demand a smaller quantity of that good or service.

question

change in demand

answer

Is a shift of the demand curve, which changes the quantity demanded at any given price.

question

movement along the demand curve

answer

A change in the quantity demanded of a good that is the result of a change in that good's price.

question

substitutes

answer

If a rise in the price of one of the goods leads to an increase in the demand for the other good.

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complements

answer

A rise in the price of one of the goods leads to a decrease in the demand for the other good.

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normal good

answer

When a rise in income increases the demand for a good—the normal case.

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inferior good

answer

When a rise in income decreases the demand for a good.

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individual demand curve

answer

Illustrates the relationship between quantity demanded and price for an individual consumer.

question

quantity supplied

answer

The actual amount of a good or service people are willing to sell at some specific price.

question

supply schedule

answer

Shows how much of a good or service producers would supply at different prices.

question

supply curve

answer

Shows the relationship between the quantity supplied and the price.

question

law of supply

answer

Says that, other things being equal, the price and quantity supplied of a good are positively related.

question

change in supply

answer

Is a shift of the supply curve, which changes the quantity supplied at any given price.

question

movement along the supply curve

answer

Is a change in the quantity supplied of a good arising from a change in the good's price.

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input

answer

Is a good or service that is used to produce another good or service.

question

individual supply curve

answer

Illustrates the relationship between quantity supplied and price for an individual producer.

question

equilibrium

answer

An economic situation when no individual would be better off doing something different.

question

equilibrium price

answer

When the price has moved to a level at which the quantity demanded of a good equals the quantity supplied of that good. Also referred to as the market-clearing price.

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equilibrium quantity

answer

The quantity of the good bought and sold at the equilibrium price.

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surplus

answer

When the quantity supplied exceeds the quantity demanded.

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shortage

answer

When the quantity demanded exceeds the quantity supplied.

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price controls

answer

Legal restrictions on how high or low a market price may go.

question

price ceiling

answer

A maximum price sellers are allowed to charge for a good or service.

question

price floor

answer

A minimum price buyers are required to pay for a good or service.

question

inefficient allocation to consumers

answer

People who want the good badly and are willing to pay a high price don't get it, and those who care relatively little about the good and are only willing to pay a relatively low price do get it.

question

wasted resources

answer

People expend money, effort, and time to cope with the shortages caused by the price ceiling.

question

inefficiently low quality

answer

Sellers offer low quality goods at a low price even though buyers would prefer a higher quality at a higher price.

question

black market

answer

A market in which goods or services are bought and sold illegally—either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling.

question

minimum wage

answer

A legal floor on the hourly wage rate paid for a worker's labor.

question

inefficient allocation of sales among sellers

answer

Those who would be willing to sell the good at the lowest price are not always those who manage to sell it.

question

inefficiently high quality

answer

Sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price.

question

quantity control or quota

answer

Is an upper limit on the quantity of some good that can be bought or sold.

question

license

answer

Gives its owner the right to supply a good or service.

question

demand price

answer

The price at which consumers will demand that quantity.

question

supply price

answer

The price at which producers will supply that quantity.

question

wedge

answer

The price paid by buyers ends up being higher than that received by sellers.

question

quota rent

answer

The earnings that accrue to the license-holder from ownership of the right to sell the good. It is equal to the market price of the license when the licenses are traded.

question

deadweight loss

answer

The value of forgone mutually beneficial transactions.

question

substitution effect

answer

the change in the quantity of a good demanded as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive.

question

income effect

answer

the change in the quantity of a good demanded that results from a change in the consumer's purchasing power when the price of the good changes.

question

price elasticity of demand

answer

the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve (dropping the minus sign).

question

midpoint method

answer

a technique for calculating the percent change by dividing the change in a variable by the average, or midpoint, of the initial and final values of that variable.

question

perfectly inelastic demand

answer

when the quantity demanded does not respond at all to changes in the price; when demand is perfectly inelastic, the demand curve is a vertical line.

question

perfectly elastic demand

answer

when any price increase will cause the quantity demanded to drop to zero; when demand is perfectly elastic, the demand curve is a horizontal line.

question

elastic demand

answer

when the price elasticity of demand is greater than 1.

question

inelastic demand

answer

when the price elasticity of demand is less than 1.

question

unit-elastic demand

answer

when the price elasticity of demand is exactly 1.

question

total revenue

answer

the total value of sales of a good or service; equal to the price multiplied by the quantity sold.

question

cross-price elasticity of demand

answer

question

income elasticity of demand

answer

question

income-elastic demand

answer

when the income elasticity of demand for a good is greater than 1.

question

income-inelastic demand

answer

when the income elasticity of demand for a good is positive but less than 1.

question

price elasticity of supply

answer

question

perfectly inelastic supply

answer

when the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied; a perfectly inelastic supply curve is a vertical line.

question

perfectly elastic supply

answer

when the quantity supplied is zero below some price and approaches infinity above that price; a perfectly elastic supply curve is a horizontal line.

question

willingness to pay

answer

the maximum price at which a consumer would buy a good.

question

individual consumer surplus

answer

the net gain to an individual buyer from the purchase of a good; equal to the difference between the buyer's willingness to pay and the price paid.

question

total consumer surplus

answer

the sum of the individual consumer surpluses of all the buyers of a good in a market.

question

consumer surplus

answer

the net gain received from purchasing a good or service; often used to refer to both individual consumer surplus and total consumer surplus.

question

cost

answer

the lowest price at which a seller is willing to sell a good.

question

individual producer surplus

answer

the net gain to an individual seller from selling a good; equal to the difference between the price received and the seller's cost.

question

total producer surplus

answer

the sum of the individual producer surpluses of all the sellers of a good in a market.

question

producer surplus

answer

refers to both individual and total producer surplus.

question

total surplus

answer

the total net gain to consumers and producers from trading in a market; the sum of consumer surplus and producer surplus.

question

progressive tax

answer

a tax that rises more than in proportion to income.

question

regressive tax

answer

a tax that rises less than in proportion to income.

question

proportional tax

answer

a tax that rises in proportion to income.

question

excise tax

answer

a tax on sales of a particular good or service.

question

tax incidence

answer

the distribution of the tax burden.

question

deadweight loss

answer

the value of foregone mutually beneficial transactions; (from a tax) the decrease in total surplus resulting from the tax, minus the tax revenues generated.

question

administrative costs

answer

(of a tax) the resources used by the government to collect the tax, and by taxpayers to pay (or to evade) it, over and above the amount collected.

question

lump-sum tax

answer

a tax of a fixed amount paid by all taxpayers, independent of the taxpayer's income.

question

utility

answer

a measure of personal satisfaction.

question

util

answer

a unit of utility.

question

marginal utility

answer

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

question

principle of diminishing marginal utility

answer

states that each successive unit of a good or service consumed adds less to total utility than does the previous unit.

question

marginal utility curve

answer

shows how marginal utility depends on the quantity of a good or service consumed.

question

budget constraint

answer

limits the cost of a consumer's consumption bundle to no more than the consumer's income.

question

consumption possibilities

answer

the set of all consumption bundles that are affordable, given a consumer's income and prevailing prices.

question

budget line (BL)

answer

shows the consumption bundles available to a consumer who spends all of his or her income.

question

optimal consumption bundle

answer

the consumption bundle that maximizes the consumer's total utility given his or her budget constraint.

question

optimal consumption rule

answer

says that in order to maximize utility, a consumer must equate the marginal utility per dollar spent on each good and service in the consumption bundle.

question

marginal utility per dollar

answer

the additional utility from spending one more dollar on a good or service.

question

explicit cost

answer

a cost that involves actually laying out money.

question

implicit cost

answer

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

question

economic profit

answer

a business's total revenue minus the opportunity cost of its resources; usually less than the accounting profit.

question

implicit cost of capital

answer

the opportunity cost of the capital used by a business—the income the owner could have realized from that capital if it had been used in its next best alternative way.

question

accounting profit

answer

a business's total revenue minus the explicit cost and depreciation.

question

normal profit

answer

an economic profit equal to zero; an economic profit just high enough to keep a firm engaged in its current activity.

question

optimal output rule

answer

says that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

question

marginal revenue curve

answer

shows how marginal revenue varies as output varies.

question

marginal revenue

answer

the change in total revenue generated by an additional unit of output.

question

marginal cost curve

answer

shows how the cost of producing one more unit depends on the quantity that has already been produced.

question

principle of marginal analysis

answer

says that every activity should continue until marginal benefit equals marginal cost.

question

production function

answer

the relationship between the quantity of inputs a firm uses and the quantity of output it produces.

question

short run

answer

the time period in which at least one input is fixed.

question

fixed input

answer

an input whose quantity is fixed for a period of time and cannot be varied.

question

variable input

answer

an input whose quantity the firm can vary at any time.

question

long run

answer

the time period in which all inputs can be varied.

question

total product curve

answer

shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.

question

marginal product

answer

the additional quantity of output produced by using one more unit of an input.

question

diminishing returns to an input

answer

when an increase in the quantity of an input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.

question

total cost (TC)

answer

the sum of the fixed cost and the variable cost of producing a given quantity of output.

question

total cost curve

answer

shows how total cost depends on the quantity of output.

question

fixed cost (FC)

answer

a cost that does not depend on the quantity of output produced; the cost of the fixed input.

question

variable cost (VC)

answer

a cost that depends on the quantity of output produced; the cost of the variable input.

question

average total cost (ATC)

answer

total cost divided by quantity of output produced; also known as average cost.

question

U-shaped average total cost curve

answer

falls at low levels of output and then rises at higher levels.

question

average fixed cost (AFC)

answer

the fixed cost per unit of output.

question

average variable cost (AVC)

answer

the variable cost per unit of output.

question

minimum-cost output

answer

the quantity of output at which average total cost is lowest; corresponds to the bottom of the U-shaped average total cost curve.

question

average product

answer

the total product divided by the quantity of an input.

question

average product curve

answer

shows the relationship between the average product and the quantity of an input.

question

long-run average total cost curve (LRATC)

answer

shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output.

question

minimum efficient scale

answer

the smallest quantity at which a firm's long-run average total costs is minimized.

question

economies of scale

answer

when long-run average total cost declines as output increases.

question

diseconomies of scale

answer

when long-run average total cost increases as output increases.

question

increasing returns to scale

answer

when output increases more than in proportion to an increase in all inputs; for example, doubling all inputs would cause output to more than double.

question

decreasing returns to scale

answer

when output increases less than in proportion to an increase in all inputs.

question

constant returns to scale

answer

when output increases directly in proportion to an increase in all inputs.

question

sunk cost

answer

a cost that has already been incurred and is nonrecoverable; should be ignored in a decision about future actions.

question

perfectly competitive market

answer

a market in which all market participants are price takers.

question

price-taking firm

answer

a firm whose actions have no effect on the market price of the good or service it sells.

question

price-taking consumer

answer

a consumer whose actions have no effect on the market price of the good or service he or she buys.

question

perfectly competitive industry

answer

an industry in which firms are price takers.

question

market share

answer

the fraction of the total industry output accounted for by a given firm's output.

question

standardized product

answer

describes a good produced by different firms, but that consumers regard as the same good; also known as a commodity.

question

free entry and exit

answer

when new firms can easily enter into an industry and existing firms can easily leave that industry.

question

monopolist

answer

the only producer of a good that has no close substitutes.

question

monopoly

answer

an industry controlled by a monopolist.

question

barrier to entry

answer

protects a monopolist (and allows it to persist and earn economic profits) by preventing other firms from entering the industry.

question

natural monopoly

answer

when economies of scale provide a large cost advantage to a single firm that produces all of an industry's output.

question

patent

answer

gives an inventor a temporary monopoly in the use or sale of an invention.

question

answer

gives the copyright holder for a literary or artistic work the sole right to profit from that work for a specified period of time.

question

oligopoly

answer

an industry with only a small number of firms.

question

oligopolist

answer

a producer in an oligopoly.

question

imperfect competition

answer

industry in which no one firm has a monopoly, but producers nonetheless realize that they can affect market prices.

question

monopolistic competition

answer

market structure in which there are many competing firms in an industry, each firm sells a differentiated product, and there is free entry into and exit from the industry in the long run.

question

concentration ratios

answer

measure of the percentage of industry sales accounted for by the "X" largest firms; for example, the four-firm concentration ratio or the eight-firm concentration ratio.

question

Herfindahl-Hirschman Index (HHI)

answer

the square of each firm's share of market sales summed over the industry; gives a picture of the industry market structure.

question

price-taking firm's optimal output rule

answer

says that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced.

question

break-even price

answer

the market price at which a price-taking firm earns zero profit; the minimum average total cost of such a firm.

question

shut-down price

answer

the price at which a firm ceases production in the short run; equal to minimum average variable cost.

question

short-run firm supply curve

answer

shows how an individual firm's profitmaximizing level of output depends on the market price, taking the fixed cost as given.

question

industry supply curve

answer

shows the relationship between the price of a good and the total output of the industry as a whole; also known as market supply curve.

question

short-run industry supply curve

answer

shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms.

question

long-run industry supply curve

answer

shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry.

question

long-run market equilibrium

answer

when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur.

question

constant-cost industry

answer

an industry with a horizontal (perfectly elastic) long-run supply curve; the firms' cost curves are unaffected by changes in the size of the industry.

question

increasing-cost industry

answer

an industry with an upward-sloping longrun supply curve; the firms' production costs increase with the size of the industry.

question

decreasing-cost industry

answer

an industry with a downward-sloping long-run supply curve; the firms' production costs decrease as the industry grows.

question

public ownership

answer

(of a monopoly) when a good is supplied by the government, or by a firm owned by the government, instead of by a monopolist.

question

price regulation

answer

limits the price that a monopolist is allowed to charge.

question

single-price monopolist

answer

firm that charges all consumers the same price.

question

price discrimination

answer

when firms charge different prices to different consumers for the same good.

question

perfect price discrimination

answer

when a monopolist charges each consumer his or her willingness to pay—the maximum that the consumer is willing to pay.

question

interdependence

answer

when the outcome (profit) of each firm depends on the actions of the other firms in the market.

question

duopoly

answer

an oligopoly consisting of only two firms.

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duopolist

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each of the two firms in a duopoly.

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cartel

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a group of producers that agree to restrict output in order to increase prices and their joint profits.

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collusion

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when sellers cooperate to raise their joint profits.

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noncooperative behavior

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when firms act in their own self-interest, ignoring the effects of their actions on each other's profits.

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game theory

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the study of behavior in situations of interdependence.

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payoff

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the reward received by a player in a game, such as the profit earned by an oligopolist.

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payoff matrix

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shows how the payoff to each of the participants in a two-player game depends on the actions of both. Such a matrix helps us analyze situations of interdependence.

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dominant strategy

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a player's best action regardless of the action taken by the other player.

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prisoners' dilemma

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Nash equilibrium

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the result when each player in a game chooses the action that maximizes his or her payoff, given the actions of other players; also called noncooperative equilibrium.

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noncooperative equilibrium

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see "Nash equilibrium."

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strategic behavior

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when a firm attempts to influence the future behavior of other firms.

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tit for tat

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a strategy that involves playing cooperatively at first, then doing whatever the other player did in the previous period.

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tacit collusion

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when firms limit production and raise prices in a way that raises each other's profits, even though they have not made any formal agreement.

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antitrust policy

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involves efforts by the government to prevent oligopolistic industries from becoming or behaving like monopolies.

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price war

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when tacit collusion breaks down and aggressive price competition causes prices to collapse.

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product differentiation

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an attempt by a firm to convince buyers that its product is different from the products of other firms in the industry.

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price leadership

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one firm sets its price first, and other firms then follow.

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nonprice competition

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when firms that have a tacit understanding not to compete on price use advertising and other means to try to increase their sales.

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excess capacity

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when firms in a monopolistically competitive industry produce less than the output at which average total cost is minimized.

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brand name

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a name owned by a particular firm that distinguishes its products from those of other firms.

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physical capital

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often referred to simply as capital—consists of manufactured (human-made) productive resources, such as equipment, buildings, tools, and machines, used to produce other goods and services.

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human capital

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

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factor distribution of income

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the division of total income among land, labor, capital, and entrepreneurship.

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marginal revenue product

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the additional revenue generated by employing one more unit of a factor.

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marginal revenue product curve

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shows how the marginal revenue product of a factor depends on the quantity of that factor employed.

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derived demand

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demand for a factor is a derived demand because it results from (that is, it is derived from) the demand for the output being produced.

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equilibrium marginal revenue product

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the additional revenue generated by the last unit of a factor employed in the factor market as a whole.

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rental rate

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the cost, explicit or implicit, of using a unit of an asset, either land or capital, for a given period of time.

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marginal productivity theory of income distribution

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states that every factor of production is paid the equilibrium marginal revenue product.

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economic rent

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the payment to a factor of production in excess of the minimum payment necessary to employ that factor.

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leisure

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the time available for purposes other than earning money to buy marketed goods.

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individual labor supply curve

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shows how the quantity of labor supplied by an individual depends on that individual's wage rate.

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marginal factor cost

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the additional cost of employing an additional unit of a factor of production.

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monopsonist

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a single buyer in a factor market.

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monopsony

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a market in which there is a monopsonist.

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cost-minimization rule

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employ factors so that the marginal product per dollar spent on each factor is the same; this rule is used by a firm to determine the cost-minimizing combination of inputs.

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compensating differentials

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

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unions

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organizations of workers that try to raise wages and improve working conditions for their members by bargaining collectively.

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efficiency wages

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wages that exceed the market equilibrium wage rate; employers use efficiency wages to motivate hard work and reduce worker turnover.

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socially optimal quantity

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the quantity that society would choose if all the costs and benefits of pollution were fully accounted for.

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marginal social cost

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the additional cost imposed on society as a whole by one additional unit.

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marginal social benefit

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the additional gain to society as a whole from an additional unit.

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external cost

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an uncompensated cost that an individual or a firm imposes on others.

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external benefit

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a benefit that an individual or a firm confers on others without receiving compensation.

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externalities

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external costs and external benefits.

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negative externalities

answer

external costs.

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positive externalities

answer

external benefits.

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market failure

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when the outcome in a market is ineffective.

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Coase theorem

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states that payment between private parties can achieve an efficient solution to externality problems as long as transaction costs are sufficiently low.

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internalize the externalities

answer

when individuals take external costs or external benefits into account, they internalize the externalities.

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transaction costs

answer

the costs to individuals of making a deal.

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environmental standards

answer

rules that protect the environment by specifying limits for or actions by producers and consumers.

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tradable emissions permits

answer

licenses to emit limited quantities of pollutants that can be bought and sold by polluters.

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technology spillover

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an external benefit that results when new technological knowledge spreads among firms.

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marginal private benefit

answer

the marginal benefit that accrues to consumers of the good, not including any external benefits.

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marginal external benefit

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the addition to external benefits created by one more unit of the good.

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Pigouvian subsidy

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a payment designed to correct for the effects of external benefits.

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marginal private cost

answer

the marginal cost of producing the good, not including any external costs.

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marginal external cost

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the increase in external costs to society created by one more unit of the good.

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Pigouvian taxes

answer

taxes designed to correct for the effects of external costs.

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network externality

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when the value of a good to an individual depends on how many people also use the good.

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excludable

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a good is excludable if the supplier of that good can prevent people who do not pay from consuming it.

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rival in consumption

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a good is rival in consumption if the same unit of the good cannot be consumed by more than one person at the same time.

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private good

answer

a good that is both excludable and rival in consumption.

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nonexcludable

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when a good is nonexcludable, the supplier cannot prevent consumption by people who do not pay for it.

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nonrival in consumption

answer

a good is nonrival in consumption if more than one person can consume the same unit of the good at the same time.

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free-rider problem

answer

goods that are nonexcludable suffer from the free-rider problem. Individuals have no incentive to pay for their own consumption and instead will take a "free ride" on anyone who does pay.

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public good

answer

both nonexcludable and nonrival in consumption.

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common resource

answer

nonexcludable and rival in consumption; you can't stop others from consuming the good, and when they consume it, less of the good is available for you.

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overuse

answer

the depletion of a common resource that occurs when individuals ignore the fact that their use depletes the amount of the resource remaining for others.

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artificially scarce good

answer

a good that is excludable but nonrival in consumption.

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marginal cost pricing

answer

occurs when regulators set a monopoly's price equal to its marginal cost to achieve efficiency.

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average cost pricing

answer

occurs when regulators set a monopoly's price equal to its average cost to prevent the firm from incurring a loss.

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poverty threshold

answer

the annual income below which a family is officially considered poor.

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poverty rate

answer

the percentage of the population with incomes below the poverty threshold.

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median household income

answer

the income of the household lying in the middle of the income distribution.

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mean household income

answer

the average income across all households.

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Lorenz curve

answer

shows the percentage of all income received by the poorest members of the population, from the poorest 0% to the poorest 100%.

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Gini coefficient

answer

a number that summarizes a country's level of income inequality based on how unequally income is distributed.

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means-tested program

answer

program available only to individuals or families whose incomes fall below a certain level.

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in-kind benefit

answer

a benefit given in the form of goods or services.

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negative income tax

answer

a program that supplements the income of low-income workers.

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