Microeconomics chapter 1 to 5

an inefficient allocation of resources caused by government intervention in the (public) economy
such as principal agent problem, the special interest effect, the collective action probelm, rent seeking and politcal corruption.

situation in which an agent performing activities on behalf of a principal pursues his or her own interests

Any political outcome in which a small group ("special interest") gains substantially at the expense of a much larger number of persons who each individually suffers a small loss.

The idea that getting a group to pursue a common, collective goal gets harder the larger the group's size.
Larger groups are more costly to organize and their members more difficult to motivate because the larger the group, the smaller each member's share of the benefits if the group succeeds.

Narrow, specially designated spending authorizations placed in broad legislation by senators and representatives for the purpose of providing benefits to firms and organizations within their constituencies. Earmarked projects are exempt from competitive bidding and normal evaluation procedures.

an appeal to the government for special benefits at the taxpayers' or someone else's expense
EXample: a domestic industry group using resources to try to block imports

only 2 or 3 choices for candidates at election.
bureaucracy and inefficiency.
public agencies less efficient than private businesses.
no test of profit and loss.
government employees often gain political clout and bureaucrats justify their employment.

occur when politicians commit to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures.

the amount by which expenditures exceed revenues in any year

deficits may allow the government to control and direct an inefficiently large fraction of the economy's resources

An economic crisis in which government debt has risen so high that the government is unable to borrow any more money due to people losing faith in the government's ability to repay. Leads to either massive spending cuts or large tax increases, either of which will likely plunge the economy into a recession.

Changes in government spending and tax collections designed to achieve full employment, price stability, and economic growth; also called discretionary policy.

A central bank's changing of the money supply to influence interest rates and assist the economy in achieving price-level stability, full employment, and economic growth.

the removal of most or even all of the government regulation and laws designed to supervise an industry. Sometimes undertaken to combat regulatory capture.

A type of investment subsidy in which the government agrees to guarantee (pay off) the money borrowed by a private company to fund investment projects if the private company itself fails to repay the loan.

The unlawful misdirection of governmental resources or actions that occurs when government officials abuse their entrusted powers for personal gain.

1) a government official must be bribed to do what he should be doing as part of his job
2) a government official demands a bribe to do something that she is not legally entitled to do

government's right to coerce.
force can increase economic efficiency.
correct market failures (positive and negative externalities)
reduce private sector economic risks.

- No invisible Hand
- Massive Size and Scope
- The Need for Bureaucracy
- The Need for Paperwork and Flexibility
- The Information Aggregation problem
- Lack of Accountability

the theory that industries dominate the agencies that regulate them

market-based pollution control system in which the government sets an overall limit on how much of a pollutant is acceptable and issues vouchers to pollute to each company, which companies are then free to trade

a fee that the government charges polluters for each unit of greenhouse gas they emit

the economic analysis of government decision making, politics, and elections

a situation in which a market left on its own fails to allocate resources efficiently

one group of legislators helps another with the understanding that at some point in the future they, in turn, will be helped.

The question of why citizens vote even though their individual votes stand little chance of changing the election outcome.

refers to the practice that congressional representatives follow when they obtain unneeded benefits for their own districts.

The theory that under majority rule the median (middle) voter will be in the dominant position to determine the outcome of an election.

Underallocations of resources that occur when private demand curves understate consumers' full willingness to pay for a good or service.
example: When it is not possible to charge consumers for the product. (viewing the sun, fireworks)

overallocation of resources that occur when private supply curves understate the full cost of producing a good or service
Occurs when a firm does not pay the full cost of producings it output.

demand curve must reflect the consumers full willingness to pay

supply curve must reflect all the costs of production

Benefit surpluses are maimixed for consumers and producers

the difference between what a consumer is willing to pay for a good and what the consumer actually pays
*extra benefit from paying less than the maximum price

The difference between the actual price a producer receives (or producers receive) and the minimum acceptable price

also called deadweight losses, reduction in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service

Occurs when too few resources are allocated to the production of a good relative to what is socially most desirable.

Occurs when too many resources are allocated to the production of a good relative to what is socially most desirable, resulting in its overproduction.

A good, or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits.

rivalry and excludability

1. The characteristic of a private good, the consumption of which by one party excludes other parties from obtaining the benefit.
2. The attempt by one firm to gain strategic advantage over another firm to enhance market share or profit

The characteristic of a private good,
for which the seller can keep nonbuyers from obtaining the good.

A good or service that is characterized by nonrivalry and nonexcludability; a good or service with these characteristics provided by government.

non-rivalry and non-excludability

The idea that one person's benefit from a certain good does not reduce the benefit available to others; a characteristic of a public good.

the inability to keep non payers (free riders) from obtaining benefits from a certain good; a characteristic of a public good

The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability.

A comparison of the marginal costs of a government project or program with the marginal benefits to decide whether or not to employ resources in that project or program and to what extent

resources diverted from private good production
private goods that will not be produced

the extra satisfaction from the output of more public goods

As it applies to cost-benefit analysis, the tenet that a government project or program should be expanded to the point where the marginal cost and marginal benefit of additional expenditures are equal.

A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an underallocation of resources.

government taxes individuals and businesses, takes the money and spends on production of public goods

a cost or benefit from production or consumption, that accrues to someone other than the imeediate buyers and sellers of the product being produced or consumed

Too little is produced
Demand-side market failures

Too much is produced
Supply-side market failures

represents the actions taken by government to affect the economy

A tax or charge levied on the production of a product that generates negative externalities. If set correctly, the tax will precisely offset the overallocation (overproduction) generated by the negative externality.

the idea, first stated by economist Ronald Coase, that some externalities can be resolved through private negotiations of the affected parties

the reduction of a negative externality such as pollution to the level at which the marginal benefit and marginal cost of reduction are equal

unequal knowledge possessed by the parties to a transaction

a problem that arises when people don't have to bear the negative consequences of their actions

a problem that occurs when buyers and sellers have different amounts of information about the good for sale and use that information to the detriment of the other

the price of one nation's currency in terms of another nation's currency

interaction between buyers and sellers
Can be local, national or international

discovered in the interactions of buyers and sellers

amount consumers are willing and able to purchase at a given price

Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

the change in consumption resulting from a change in real income

when consumers react to an increase in a good's price by consuming less of that good and more of other goods

shifts of the demand curve due to changes in tastes, income, other goods, or expectations

Change in consumer tastes and preferences
Change in the number of buyers
Change in income

A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.

a good that consumers demand less of when their incomes increase

Goods that are commonly used with other goods

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

If people expect prices to change in the near future, demand curves will shift in anticipation of the change.

amount producers are willing and able to sell at a given price

Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls

shifts the supply curve

A change in resource prices
A change in technology
A change in the number of sellers
A change in taxes and subsidies
A change in prices of other goods
A change in producer expectations

the point of intersection of demand and supply curves of a given commodity; at equilibrium the market is cleared of the commodity

the price that balances quantity supplied and quantity demanded

A situation in which quantity supplied is greater than quantity demanded

A situation in which quantity demanded is greater than quantity supplied

productive efficiency and allocative efficiency

The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar's worth of input is the same for all inputs.

Producing the right mix of goods
The combination of goods most highly valued by society

An increase in demand results in an increase in price and an increase in quantity exchanged.

A decrease in demand results in a decrease in price and a decrease in the quantity exchanged.
direct relationship

Supply increase: price down, quantity demanded up
S decrease: price up, quantity demanded down
inverse relationship

A legal maximum on the price at which a good can be sold

A legal minimum on the price at which a good can be sold

The set of mechanisms and institutions that resolve the what, how, and for whom questions

Theory that opposes governmental interference in economic affairs beyond what is necessary to protect life and property.

known as socialism or communism
government ownership of resources
decisions made by a central planning board

a mix of decentralized decision making with some government control

Private property
Freedom of enterprise
Freedom of choice
Self-interest
Competition
Market and prices

the development of skills in a specific kind of work

Division of work into a number of separate tasks to be performed by different workers

anything that serves as a medium of exchange, a unit of account, and a store of value

anything that is used to determine value during the exchange of goods and services

Exchange goods without involving money.

- Government may be needed to alleviate market failures
- Government can increase effectiveness of a market system
- Possible government failure

What goods and services will be produced?
How will the goods and services be produced?
Who will get the goods and services?
How will the system accommodate change?
How will the system promote progress?

The determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy; consumers' direction of production through their dollar votes.

the "votes" that consumers cast for the production of preferred products when they purchase those products rather than the alternatives that were also available.

the creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business

A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all

1. Efficiency
2. Incentives
3. Freedom

adam smith

a model that illustrates how participants in markets are linked

sole proprietorship, partnership, and corporation

A business owned by one person

A business in which two or more persons combine their assets and skills

A legal entity ("person") chartered by a state or the federal government that is distinct and separate from the individuals who own it.

the market in which households purchase the goods and services that firms produce

a market in which households sell and firms buy resources or the services of resources

buy resources, sell products

sell resources, buy products

both variables change in the same direction

variables move in opposite directions

Rise over run

vertical change/horizontal change

represented by a change in y

represented by a change in x

y is the dependant variable
a is the vertical intercept
b is the slope of the line
x is the independant variable

the social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity

limited goods and services, nothing freely available, restricts options and forces decision

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

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

Ability or capacity of a good or service to be useful and give satisfaction to someone.

Rational self-interest
Individuals and utility
Firms and profit
Desired outcome

a method of procedure that has characterized natural science since the 17th century, consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses.

a widely accepted generalization about the economic behavior of individuals or institutions

all other relevant factors remain unchanged
ceteris paribus

the stufy of the indivdual consumer, firm, or market

The study of the economy as a whole

economic statements that are factual

economic statements that involve value judgements

limited income and unlimited wants

A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices.

land, labor, capital, and entrepreneurial ability

A person who organizes, manages, and takes on the risks of a business.

A model that shows the goods and services that an economy is capable of producing - its opportunities - given the factors of production and the technology it has available.

products and services that satisfy human wants directly

goods that are used in producing other goods, rather than being bought by consumers.

As more of a particular product is produced, the marginal opportunity cost increases