Study Guide

the study of individual choice, and how that choice is influenced by economic forces

the study of the economy as a whole

• • it steal from people against their will (taxes) for no intrinsic benefit
• • provides no incentives for people to work hard and improve their skills
• • leads to inefficient government policies

The invisible hand is the price mechanism, the rise and fall of prices that guides our actions in a market.

A market force is an economic force that is given relatively free rein by society to work through the market.

Market forces ration by changing prices. When there’s a shortage, the price goes up. When there’s a surplus, the price goes down.

Social, cultural, and political forces play a major role in deciding whether to let market forces operate

an economic system based on individuals’ goodwill toward others, not on their own self-interest, and in which, in principle, society decides what, how, and for whom to produce.

An economic system based on the market in which the ownership of the means of production resides with a small group of individuals called capitalists.

An economic system in which traditions rule.

An action (or inaction) taken by government to influence economic actions.

Laissez-faire

behavioral economic policy

is an economic policy of leaving coordination of individuals’ actions to the market

economic policy based upon models using behavioral economic building blocks that take into account people’s predictable irrational behavior

Politicians

Businesses, households, and government

• personal income tax,
• the corporate income tax,
• the Social Security tax.

• externalities,
• public goods,
• imperfect information.

An entrepreneur is an individual who sees an opportunity to sell an item at a price higher than the average cost of producing it.

What’s left over from total revenues after all the appropriate costs have been subtracted. That is, Total revenue 2 Total cost. Also, a return on entrepreneurial activity and risk taking.

Monitoring costs are the costs incurred by the organizer of production in seeing to it that the employees do what they’re supposed to do.

Income taxes

Sales taxes,

Property taxes,

a social insurance program that provides financial benefits to the elderly and disabled and to their eligible dependents and/or survivors.

An excess of revenues over payments

A good that can be used in place of another good.

• refers to the physical characteristics of the market within which
• firms interact.

a market structure in which there are many firms selling differentiated products and few barriers to entry

a market structure in which there are only a few firms and firms explicitly take other firms’ likely response into account

a market in which economic forces operate unimpeded.

A market structure in which one firm makes up the entire market.

a factor market in which individuals supply labor services for wages to other individuals and to firms that need (demand) labor services

The combining of two companies in the same industry

A combination of two companies that are involved in different phases of producing a product

A transaction in which a company buys another company and the purchaser has the right of direct control over the resulting operation

A contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking

The transformation of factors into goods and services.

Costs that are spent and cannot be changed in the period of time under consideration.

Costs that change as output changes

economies that occur because of increases in the amount of one good a firm is producing.

occur when producing different types of goods lowers the cost of each of those goods.

is a firm or individual who takes the price determined by market supply and demand as given

Both buyers and seller

set the price

Firms

social, political, or economic impediments that prevent firms from entering a market.

an oligopoly with only two firms.

A type of collusion in which multiple firms make the same pricing decisions even though they have not explicitly consulted with one another.

Difficult to prove

difficult to prove

easier to prove

that prices tend to be sticky—they don’t change frequently.

Legal protection of a technological innovation that gives the owner of the patent sole rights to its use and distribution for a limited time.

taxes governments place on internationally traded goods —generally imports.

is a total restriction on the import or export of a good.

a law that made four specific monopolistic practices illegal when their effect was to lessen competition

a law that made it illegal for firms to use “unfair methods of competition” and to engage in “unfair or deceptive acts or practices,”

is a good that is nonexclusive and nonrival. (education, defense, roads, and legal systems) government provided

only benefit to the person buying the good

demand curves are sum horizontally;

sum demand curves vertically.

is the government’s policy toward the competitive process.

is a U.S law designed to regulate the competitive process.

is selling identical goods to different customers at different prices.

• Ex. Movie theaters give discounts to senior citizens and children
• Ex. Airline Super Saver fares include Saturday-night stay overs.
• Ex. Automobiles are seldom sold at list price.

states that quantity supplied is positively related to price, the slope of an equation specifying a supply curve is positive

states that as price rises, quantity demanded declines

so a demand curve has a negative slope.

• relative prices, not nominal prices. are affected

income or price of another good, shift the entire demand curve.

• foreign income
• exchange rate fluctuations
• the distribution of income,
• expectations,
• government policies.

True

• • Changes in input prices.
• • Productivity.
• • Import prices.
• • Excise and sales taxes.

is a government-set price below the market equilibrium price.

An excess of revenues over payments.

A graphical representation of the relationshipbetween price and quantity supplied.

A concept in which opposing dynamic forcescancel each other out.

The price toward which the invisiblehand drives the market.

A business with two or more owners.

A business that has only one owner

A private producing unit in our society.

• Consumer choice
• Cost of capitol
• Production possibilities

this concept applies to all aspects of life and is fundamental to understanding how society reacts to scarcity.

opportunity costs

is the observation thatafter a regulation is implemented, as time progresses, itbecomes less and less effective because firms find waysaround the regulations.