Law of Diminishing Utility
added satisfaction declines as a consumer acquires additional units of a given product
want-satisfying power. The utility of a good or service is the satisfaction or pleasure one gets from consuming it.
the total amount of satisfaction or pleasure a person derives from consuming some specific quantity—for example, 10 units—of a good or service
the extra satisfaction a consumer realizes from an additional unit of that product—for example, from the eleventh unit.
To maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility
When the consumer has "balanced his margins" using the Utility-Maximizing rule, he has achieved consumer equilibrium and has no incentive to alter his expenditure pattern. In fact, any person who has achieved consumer equilibrium would be worse off—total utility would decline—if there were any alteration in the bundle of goods purchased, providing there is no change in taste, income, products, or prices.
the impact that a change in the price of a product has on a consumer's real income and consequently on the quantity demanded of that good.
the impact that a change in a product's price has on its relative expensiveness and consequently on the quantity demanded.
the branch of economics that combines insights from economics, psychology, and neuroscience to better understand those situations in which actual choice behavior deviates from the predictions made by earlier theories, which incorrectly concluded that people were always rational, deliberate, and unswayed by emotions
Three Behavioral Economics Facts About People
1. People judge good things and bad things in relative terms, as gains and losses relative to their current situation, or status quo.
2. People experience both diminishing marginal utility for gains (as you have already seen) as well as diminishing marginal disutility for losses (meaning that each successive unit of loss hurts, but less painfully than the previous unit).
3. People are loss averse, meaning that for losses and gains near the status quo, losses are felt much more intensely than gains—in fact, about 2.5 times more intensely. Thus, for instance, the pain experienced by an investor who loses one dollar from his current status quo level of wealth will be about 2.5 times more intense than the pleasure he would have felt if he had gained one dollar relative to his current level of wealth.
Changes in people's preferences that are caused by new information that alters the frame used to define whether situations are gains or losses
the tendency that people have to put a higher valuation on anything that they currently possess (are endowed with) than on identical items that they do not own but might purchase
assumes that the typical consumer is rational and acts on the basis of well-defined preferences. Because income is limited and goods have prices, the consumer cannot purchase all the goods and services he or she might want. The consumer therefore selects the attainable combination of goods that maximizes his or her utility or satisfaction.
the payment that must be made to obtain and retain the services of a resource. It is the income the firm must provide to resource suppliers to attract resources away from alternative uses.
the monetary payments it makes to those from whom it must purchase resources that it does not own. Because these costs involve an obvious cash transaction, they are referred to as explicit costs. Be sure to remember that explicit costs are opportunity costs because every monetary payment used to purchase outside resources necessarily involves forgoing the best alternatives that could have been purchased with the money.
the opportunity costs of using the resources that it already owns to make the firm's own product rather than selling those resources to outsiders for cash. Because these costs are present but not obvious, they are referred to as implicit costs.
A firm's economic costs are the sum......
......of its explicit costs and its implicit costs:
Economic costs = explicit costs + implicit costs
the profit number that accountants calculate by subtracting total explicit costs from total sales revenue.
the typical (or "normal") amount of accounting profit that you would most likely have earned in one of these other ventures.
the result of subtracting all of your economic costs—both explicit costs and implicit costs—from revenue: Economic Profit = Revenue − Explicit Costs − Implicit Costs.
a period too brief for a firm to alter its plant capacity, yet long enough to permit a change in the degree to which the plant's current capacity is used.
a period long enough for it to adjust the quantities of all the resources that it employs, including plant capacity
Marginal product (MP)
the extra output or added product associated with adding a unit of a variable resource, in this case labor, to the production process. Thus, Marginal Product= change in total product/change in labor input
Average product (AP),
also called labor productivity, is output per unit of labor input: Average Product= total product/units of labor
law of diminishing returns
This law assumes that technology is fixed and thus the techniques of production do not change. It states that as successive units of a variable resource (say, labor) are added to a fixed resource (say, capital or land), beyond some point the extra, or marginal, product that can be attributed to each additional unit of the variable resource will decline
those costs that do not vary with changes in output. Fixed costs are associated with the very existence of a firm's plant and therefore must be paid even if its output is zero.
Average variable cost (AVC)
is calculated by dividing total variable cost (TVC) by that amount of output (Q):
AVC = TVC/Q
Average total cost (ATC)
found by dividing total cost (TC) by that output (Q) or by adding AFC and AVC at that output
Marginal cost (MC)
the extra, or additional, cost of producing one more unit of output. MC can be determined for each added unit of output by noting the change in total cost that unit's production entails
diseconomies of scale
the difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer
constant returns to scale
In some industries a rather wide range of output may exist between the output at which economies of scale end and the output at which diseconomies of scale begin. That is, there may be a range of constant returns to scale over which long-run average cost does not change
minimum efficient scale (MES)
the lowest level of output at which a firm can minimize long-run average costs
a relatively rare market situation in which average total cost is minimized when only one firm produces the particular good or service.
involves a very large number of firms producing a standardized product (that is, a product like cotton, for which each producer's output is virtually identical to that of every other producer.) New firms can enter or exit the industry very easily
a market structure in which one firm is the sole seller of a product or service (for example, a local electric utility). Since the entry of additional firms is blocked, one firm constitutes the entire industry. The pure monopolist produces a single unique product, so product differentiation is not an issue.
characterized by a relatively large number of sellers producing differentiated products (clothing, furniture, books). Present in this model is widespread nonprice competition, a selling strategy in which a firm does not try to distinguish its product on the basis of price but instead on attributes like design and workmanship (an approach called product differentiation). Either entry to or exit from monopolistically competitive industries is quite easy
involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output
All market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly
Very large numbers
A basic feature of a purely competitive market is the presence of a large number of independently acting sellers, often offering their products in large national or international markets. Examples: markets for farm commodities, the stock market, and the foreign exchange market.
Purely competitive firms produce a standardized (identical or homogeneous) product. As long as the price is the same, consumers will be indifferent about which seller to buy the product from. Buyers view the products of firms B, C, D, and E as perfect substitutes for the product of firm A. Because purely competitive firms sell standardized products, they make no attempt to differentiate their products and do not engage in other forms of nonprice competition
In a purely competitive market, individual firms do not exert control over product price. Each firm produces such a small fraction of total output that increasing or decreasing its output will not perceptibly influence total supply or, therefore, product price. In short, the competitive firm is a price taker: It cannot change market price; it can only adjust to it. That means that the individual competitive producer is at the mercy of the market. Asking a price higher than the market price would be futile. Consumers will not buy from firm A at $2.05 when its 9999 competitors are selling an identical product, and therefore a perfect substitute, at $2 per unit. Conversely, because firm A can sell as much as it chooses at $2 per unit, it has no reason to charge a lower price, say, $1.95. Doing that would shrink its profit
Free entry and exit
New firms can freely enter and existing firms can freely leave purely competitive industries. No significant legal, technological, financial, or other obstacles prohibit new firms from selling their output in any competitive market
the change in total revenue (or the extra revenue) that results from selling one more unit of output.
All firms in the industry have identical cost curves. This assumption lets us discuss an "average," or "representative," firm, knowing that all other firms in the industry are similarly affected by any long-run adjustments that occur.
The industry is a constant-cost industry. This means that the entry and exit of firms does not affect resource prices or, consequently, the locations of the average-total-cost curves of individual firms.
This means that industry expansion or contraction will not affect resource prices and therefore production costs. Graphically, it means that the entry or exit of firms does not shift the long-run ATC curves of individual firms.
ATC curves shift upward as the industry expands and downward as the industry contracts. Usually, the entry of new firms will increase resource prices, particularly in industries using specialized resources whose long-run supplies do not readily increase in response to increases in resource demand. Higher resource prices result in higher long-run average total costs for all firms in the industry. These higher costs cause upward shifts in each firm's long-run ATC curve.
requires that goods be produced in the least costly way. In the long run, pure competition forces firms to produce at the minimum average total cost of production and to charge a price that is just consistent with that cost. This is true because firms that do not use the best available (least-cost) production methods and combinations of inputs will not survive.
occurs when it is impossible to produce any net gains for society by altering the combination of goods and services that are produced from society's limited supply of resources
the difference between the maximum prices that consumers are willing to pay for a product (as shown by the demand curve) and the market price of that product
the difference between the minimum prices that producers are willing to accept for a product (as shown by the supply curve) and the market price of the product. Producer surplus is the sum of the vertical distances between the equilibrium price and the supply curve
the main characteristics of pure monopoly:
1. Single seller A pure, or absolute, monopoly is an industry in which a single firm is the sole producer of a specific good or the sole supplier of a service; the firm and the industry are synonymous.
2. No close substitutes A pure monopoly's product is unique in that there are no close substitutes. The consumer who chooses not to buy the monopolized product must do without it.
3. Price maker The pure monopolist controls the total quantity supplied and thus has considerable control over price; it is a price maker (unlike a pure competitor, which has no such control and therefore is a price taker). The pure monopolist confronts the usual downsloping product demand curve. It can change its product price by changing the quantity of the product it produces. The monopolist will use this power whenever it is advantageous to do so.
4. Blocked entry A pure monopolist has no immediate competitors because certain barriers keep potential competitors from entering the industry. Those barriers may be economic, technological, legal, or of some other type. But entry is totally blocked in pure monopoly.
5. Nonprice competition The product produced by a pure monopolist may be either standardized (as with natural gas and electricity) or differentiated (as with Windows or Frisbees). Monopolists that have standardized products engage mainly in public relations advertising, whereas those with differentiated products sometimes advertise their products' attributes.
any activity designed to transfer income or wealth to a particular firm or resource supplier at someone else's, or even society's, expense.
the practice of selling a specific product at more than one price when the price differences are not justified by cost differences.
Price discrimination can take three forms
1. Charging each customer in a single market the maximum price she or he is willing to pay.
2. Charging each customer one price for the first set of units purchased and a lower price for subsequent units purchased.
3. Charging some customers one price and other customers another price
The seller must be a monopolist or, at least, must possess some degree of monopoly power, that is, some ability to control output and price.
At relatively low cost to itself, the seller must be able to segregate buyers into distinct classes, each of which has a different willingness or ability to pay for the product. This separation of buyers is usually based on different price elasticities of demand, as the examples below will make clear.
The original purchaser cannot resell the product or service. If buyers in the low-price segment of the market could easily resell in the high-price segment, the monopolist's price-discrimination strategy would create competition in the high-price segment. This competition would reduce the price in the high-price segment and undermine the monopolist's price-discrimination policy. This condition suggests that service industries such as the transportation industry or legal and medical services, where resale is impossible, are good candidates for price discrimination.
regulators set a regulated price that is high enough for monopolists to break even and continue in operation
Small market shares
Each firm has a comparatively small percentage of the total market and consequently has limited control over market price
The presence of a relatively large number of firms ensures that collusion by a group of firms to restrict output and set prices is unlikely.
With numerous firms in an industry, there is no feeling of interdependence among them; each firm can determine its own pricing policy without considering the possible reactions of rival firms. A single firm may realize a modest increase in sales by cutting its price, but the effect of that action on competitors' sales will be nearly imperceptible and will probably trigger no response.
Monopolistically competitive firms turn out variations of a particular product. They produce products with slightly different physical characteristics, offer varying degrees of customer service, provide varying amounts of locational convenience, or proclaim special qualities, real or imagined, for their products.
four-firm concentration ratio
expressed as a percentage, is the ratio of the output (sales) of the four largest firms in an industry relative to total industry sales.
This index is the sum of the squared percentage market shares of all firms in the industry.
the firms in the oligopoly produce differentiated products. Many consumer goods industries (automobiles, tires, household appliances, electronics equipment, breakfast cereals, cigarettes, and many sporting goods) are differentiated oligopolies
a situation in which each firm's profit depends not just on its own price and sales strategies but also on those of the other firms in its highly concentrated industry. So oligopolistic firms base their decisions on how they think their rivals will react.
Diversity of oligopolies
Oligopoly encompasses a greater range and diversity of market situations than do other market structures. It includes the tight oligopoly, in which two or three firms dominate an entire market, and the loose oligopoly, in which six or seven firms share, say, 70 or 80 percent of a market while a "competitive fringe" of firms shares the remainder. It includes both differentiated and standardized products. It includes cases in which firms act in collusion and those in which they act independently. It embodies situations in which barriers to entry are very strong and situations in which they are not quite so strong. In short, the diversity of oligopoly does not allow us to explain all oligopolistic behaviors with a single market model
Complications of interdependence
The mutual interdependence of oligopolistic firms complicates matters significantly. Because firms cannot predict the reactions of their rivals with certainty, they cannot estimate their own demand and marginal-revenue data. Without such data, firms cannot determine their profit-maximizing price and output, even in theory, as we will see
successive and continuous rounds of price cuts by rivals as they attempt to maintain their market shares.
a group of producers that typically creates a formal written agreement specifying how much each member will produce and charge
a type of implicit understanding by which oligopolists can coordinate prices without engaging in outright collusion based on formal agreements and secret meetings. Rather, a practice evolves whereby the "dominant firm"—usually the largest or most efficient in the industry—initiates price changes and all other firms more or less automatically follow the leader
a schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.1 Demand shows the quantities of a product that will be purchased at various possible prices, other things equal. Demand can easily be shown in table form
law of demand.
A fundamental characteristic of demand is this: Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, there is a negative or inverse relationship between price and quantity demanded
suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive. The product whose price has fallen is now "a better deal" relative to the other products
The inverse relationship between price and quantity demanded for any product can be represented on a simple graph, in which, by convention, we measure quantity demanded on the horizontal axis and price on the vertical axis.
determinants of demand
Factors other than price that determine the quantities demanded of a good or service
determinants of supply
Factors other than price that determine the quantities supplied of a good or service
determinants of aggregate demand
Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve
determinants of aggregate supply
Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.
Number of Buyers
An increase in the number of buyers in a market is likely to increase demand; a decrease in the number of buyers will probably decrease demand. For example, the rising number of older persons in the United States in recent years has increased the demand for motor homes, medical care, and retirement communities.
For most products, a rise in income causes an increase in demand. Consumers typically buy more steaks, furniture, and electronic equipment as their incomes increase. Conversely, the demand for such products declines as their incomes fall. Products whose demand varies directly with money income are called superior goods, or normal goods
As incomes increase beyond some point, the demand for used clothing, retread tires, and third-hand automobiles may decrease, because the higher incomes enable consumers to buy new versions of those products. Rising incomes may also decrease the demand for soy-enhanced hamburger. Similarly, rising incomes may cause the demand for charcoal grills to decline as wealthier consumers switch to gas grills. Goods whose demand varies inversely with money income are called inferior goods
Increase in demand may be caused by.....
1. A favorable change in consumer tastes.
2. An increase in the number of buyers.
3. Rising incomes if the product is a normal good.
4. Falling incomes if the product is an inferior good.
5. An increase in the price of a substitute good.
6. A decrease in the price of a complementary good.
7. A new consumer expectation that either prices or income will be higher in the future
change in demand
a shift of the demand curve to the right (an increase in demand) or to the left (a decrease in demand).
change in quantity demanded
a movement from one point to another point—from one price-quantity combination to another—on a fixed demand curve. The cause of such a change is an increase or decrease in the price of the product under consideration
a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period
law of supply
As price rises, the quantity supplied rises; as price falls, the quantity supplied falls.
determinants of supply
(1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market. A change in any one or more of these determinants of supply, or supply shifters, will move the supply curve for a product either right or left.
change in supply
The distinction between a change in supply and a change in quantity supplied parallels the distinction between a change in demand and a change in quantity demanded. Because supply is a schedule or curve, a change in supply means a change in the schedule and a shift of the curve. An increase in supply shifts the curve to the right; a decrease in supply shifts it to the left. The cause of a change in supply is a change in one or more of the determinants of supply.
change in quantity supplied
a movement from one point to another on a fixed supply curve. The cause of such a movement is a change in the price of the specific product being considered.
(or market-clearing price) is the price where the intentions of buyers and sellers match. It is the price where quantity demanded equals quantity supplied
the particular mix of goods and services most highly valued by society (minimum-cost production assumed)
sets the maximum legal price a seller may charge for a product or service. A price at or below the ceiling is legal; a price above it is not.
a minimum price fixed by the government. A price at or above the price floor is legal; a price below it is not.
The government may cope with the surplus resulting from a price floor in two ways......
.......It can restrict supply (for example, by instituting acreage allotments by which farmers agree to take a certain amount of land out of production) or increase demand (for example, by researching new uses for the product involved). These actions may reduce the difference between the equilibrium price and the price floor and that way reduce the size of the resulting surplus.
If these efforts are not wholly successful, then the government must purchase the surplus output at the $3 price (thereby subsidizing farmers) and store or otherwise dispose of it.
price elasticity of demand.
For some products—for example, restaurant meals—consumers are highly responsive to price changes. Modest price changes cause very large changes in the quantity purchased. Economists say that the demand for such products is relatively elastic or simply elastic.
If a specific percentage change in price produces a smaller percentage change in quantity demanded
The case separating elastic and inelastic demands occurs where a percentage change in price and the resulting percentage change in quantity demanded are the same
perfectly inelastic demand
Product or resource demand in which price can be of any amount at a particular quantity of the product or resource demanded; quantity demanded does not respond to a change in price; graphs as a vertical demand curve
perfectly elastic demand
Product or resource demand in which quantity demanded can be of any amount at a particular product price; graphs as a horizontal demand curve
the period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied.
The short run in microeconomics....
...... is a period of time too short to change plant capacity but long enough to use the fixed-sized plant more or less intensively.
The long run in microeconomics ......
.......is a time period long enough for firms to adjust their plant sizes and for new firms to enter (or existing firms to leave) the industry.
cross elasticity of demand
measures how sensitive consumer purchases of one product (say, X) are to a change in the price of some other product (say, Y).
Income elasticity of demand
measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good.
The underlying purpose of antitrust policy (antimonopoly policy......
....... is to prevent monopolization, promote competition, and achieve allocative efficiency
In the few markets where the nature of the product or technology creates a natural monopoly, the government established public regulatory agencies to control economic behavior
In most other markets, social control took the form of antitrust (antimonopoly) legislation designed to inhibit or prevent the growth of monopoly.
Sherman Act of 1890
This cornerstone of antitrust legislation is surprisingly brief and, at first glance, directly to the point. The core of the act resides in two provisions:
Section 1 "Every contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations is declared to be illegal."
Section 2 "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a felony" (as later amended from "misdemeanor").
The Sherman Act thus outlawed......
...........restraints of trade (for example, collusive price-fixing and dividing up markets) as well as monopolization
The Clayton Act of 1914
contained the desired elaboration of the Sherman Act. Four sections of the act, in particular, were designed to strengthen and make explicit the intent of the Sherman Act:
Section 2 outlaws price discrimination when such discrimination is not justified on the basis of cost differences and when it reduces competition.
Section 3 prohibits tying contracts, in which a producer requires that a buyer purchase another (or others) of its products as a condition for obtaining a desired product.
Section 7 prohibits the acquisition of stocks of competing corporations when the outcome would be less competition.
Section 8 prohibits the formation of interlocking directorates—situations where a director of one firm is also a board member of a competing firm—in large corporations where the effect would be reduced competition.
Federal Trade Commission Act
created the five-member Federal Trade Commission (FTC), which has joint Federal responsibility with the U.S. Justice Department for enforcing the antitrust laws. The act gave the FTC the power to investigate unfair competitive practices on its own initiative or at the request of injured firms.
Wheeler-Lea Act of 1938
amended the Federal Trade Commission Act to give the FTC the additional responsibility of policing "deceptive acts or practices in commerce." In so doing, the FTC tries to protect the public against false or misleading advertising and the misrepresentation of products. So the Federal Trade Commission Act, as modified by the Wheeler-Lea Act, (1) established the FTC as an independent antitrust agency and (2) made unfair and deceptive sales practices illegal.
amended the Clayton Act, Section 7, which prohibits a firm from merging with a competing firm (and thereby lessening competition) by acquiring its stock. Firms could evade Section 7, however, by instead acquiring the physical assets (plant and equipment) of competing firms. The Celler-Kefauver Act closed that loophole by prohibiting one firm from obtaining the physical assets of another firm when the effect would be reduced competition
1911 Standard Oil case
the Supreme Court found Standard Oil guilty of monopolizing the petroleum industry through a series of abusive and anticompetitive actions.
1920 U.S. Steel case
the courts established the so-called rule of reason, under which not every monopoly is illegal. Only monopolies that "unreasonably" restrain trade violate Section 2 of the Sherman Act and are subject to antitrust action. Size alone is not an offense. Under the rule of reason, U.S. Steel was innocent of "monopolizing" because it had not resorted to illegal acts against competitors in obtaining and then maintaining its monopoly power. Unlike Standard Oil, which was a so-called bad trust, U.S. Steel was a "good trust" and therefore not in violation of the law.
Alcoa case of 1945
the courts touched off a 20-year turnabout. The Supreme Court sent the case to the U.S. court of appeals in New York because four of the Supreme Court justices had been involved with litigation of the case before their appointments. Led by Judge Learned Hand, the court of appeals held that, even though a firm's behavior might be legal, the mere possession of monopoly power (Alcoa held 90 percent of the aluminum ingot market) violated the antitrust laws. So Alcoa was found guilty of violating the Sherman Act
assume that any firm with a very high market share will behave like a monopoly. As a result, they assert that any firm with a very high market share is a legitimate target for antitrust action. Structuralists argue that changes in the structure of an industry, say, by splitting the monopolist into several smaller firms, will improve behavior and performance
assert that the relationship among structure, behavior, and performance is tenuous and unclear. They feel a monopolized or highly concentrated industry may be technologically progressive and have a good record of providing products of increasing quality at reasonable prices. If a firm has served society well and has engaged in no anticompetitive practices, it should not be accused of antitrust violation just because it has an extraordinarily large market share. That share may be the product of superior technology, superior products, and economies of scale.
Why might one administration enforce the antitrust laws more or less strictly than another?
The main reason is differences in political philosophies about the market economy and the wisdom of intervention by government.
a merger between two competitors that sell similar products in the same geographic market
any merger that is not horizontal or vertical; in general, it is the combination of firms in different industries or firms operating in different geographic areas
exists when economies of scale are so extensive that a single firm can supply the entire market at a lower average total cost than could a number of competing firms.
public interest theory of regulation
industrial regulation is necessary to keep a natural monopoly from charging monopoly prices and thus harming consumers and society. The goal of such regulation is to garner for society at least part of the cost reductions associated with natural monopoly while avoiding the restrictions of output and high prices associated with unregulated monopoly. If competition is inappropriate or impractical, society should allow or even encourage a monopoly but regulate its prices. Regulation should then be structured so that ratepayers benefit from the economies of scale—the lower per-unit costs—that natural monopolists are able to achieve
legal cartel theory of regulation
In place of having socially minded officials forcing regulation on natural monopolies to protect consumers, holders of this view see practical politicians "supplying" regulation to local, regional, and national firms that fear the impact of competition on their profits or even on their long-term survival.
Natural monopoly occurs .......
.......where economies of scale are so extensive that only a single firm can produce the product at minimum average total cost.
The public interest theory of regulation says that government ............
.........must regulate natural monopolies to prevent abuses arising from monopoly power. Regulated firms, however, have less incentive than competitive firms to reduce costs. That is, regulated firms tend to be X-inefficient
Deregulation initiated by government in the past several decades ...........
.......has yielded large annual efficiency gains for society
Social regulation is concerned with........
..........the conditions under which goods and services are produced, the effects of production on society, and the physical characteristics of the goods themselves
Defenders of social regulation point to the benefits arising from policies that ..........
........keep dangerous products from the marketplace, reduce workplace injuries and deaths, contribute to clean air and water, and reduce employment discrimination
Critics of social regulation say........
..........uneconomical policy goals, inadequate information, unintended side effects, and overzealous personnel create excessive regulation, for which regulatory costs exceed regulatory benefits
National income accounting
The Bureau of Economic Analysis (BEA), an agency of the Commerce Department, compiles the National Income and Product Accounts (NIPA) for the U.S. economy. This accounting enables economists and policymakers to:
Assess the health of the economy by comparing levels of production at regular intervals.
Track the long-run course of the economy to see whether it has grown, been constant, or declined.
Formulate policies that will safeguard and improve the economy's health.
gross domestic product (GDP)
defines aggregate output as the dollar value of all final goods and services produced within the borders of a country during a specific period of time, typically a year
Wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once.
To measure aggregate output accurately, all goods and services produced in a particular year must be counted......
......once and only once
GDP includes only the market value of final goods and ignores........
...........intermediate goods altogether
the market value of a firm's output less the value of the inputs the firm has bought from others. At each stage, the difference between what a firm pays for inputs and what it receives from selling the product made from those inputs is paid out as wages, rent, interest, and profit
Public transfer payments
These are the social security payments, welfare payments, and veterans' payments that the government makes directly to households. Since the recipients contribute nothing to current production in return, to include such payments in GDP would be to overstate the year's output.
Private transfer payments
Such payments include, for example, the money that parents give children or the cash gifts given during the holidays. They produce no output. They simply transfer funds from one private individual to another and consequently do not enter into GDP
Stock market transactions
The buying and selling of stocks (and bonds) is just a matter of swapping bits of paper. Stock market transactions create nothing in the way of current production and are not included in GDP. Payments for the services provided by a stockbroker are included, however, because their services are currently provided and are thus a part of the economy's current output of goods and services
Secondhand sales contribute nothing to current production and for that reason are excluded......
personal consumption expenditures
"consumption expenditures by households," This term covers all expenditures by households on goods and services.
products that have expected lives of three years or more. Such goods include new automobiles, furniture, and refrigerators
products with less than three years of expected life. Included are goods like food, clothing, and gasoline
gross private domestic investment
Expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories.
net private domestic investment
Net investment = gross investment − depreciation. Gross private domestic investment less consumption of fixed capital; the addition to the nation's stock of capital during a year
When gross investment and depreciation are equal......
......net investment is zero and there is no change in the size of the capital stock.
officially labeled "government consumption expenditures and gross investment." These expenditures have two components: (1) expenditures for goods and services that government consumes in providing public services and (2) expenditures for publicly owned capital such as schools and highways, which have long lifetimes. Government purchases (Federal, state, and local) include all government expenditures on final goods and all direct purchases of resources, including labor. It does not include government transfer payments because, as we have seen, they merely transfer government receipts to certain households and generate no production of any sort. National income accountants use the symbol G to signify government purchases.
taxes on production and imports
includes general sales taxes, excise taxes, business property taxes, license fees, and customs duties
the total of all sources of private income (employee compensation, rents, interest, proprietors' income, and corporate profits) plus government revenue from taxes on production and imports. National income is all the income that flows to American-supplied resources, whether here or abroad, plus taxes on production and imports
consumption of fixed capital
The huge depreciation charge made against private and publicly owned capital each year
Gross domestic product (GDP) is a measure of the total market value ....
..........of all final goods and services produced by the economy in a specific year
The economy's stock of private capital expands when net investment is positive; stays constant when net investment is zero; and declines....
.....when net investment is negative
net domestic product (NDP):
NDP is simply GDP adjusted for depreciation. It measures the total annual output that the entire economy—households, businesses, government, and foreigners—can consume without impairing its capacity to produce in ensuing years
Net domestic product (NDP) is the market value of GDP........
.........minus consumption of fixed capital (depreciation).
A GDP based on the prices that prevailed when the output was produced is called unadjusted GDP, or nominal GDP.
A GDP that has been deflated or inflated to reflect changes in the price level is called adjusted GDP, or real GDP.
a measure of the price of a specified collection of goods and services, called a "market basket," in a given year as compared to the price of an identical (or highly similar) collection of goods and services in a reference year. That point of reference, or benchmark, is known as the base period, base year, or simply, the reference year.
The growth of GDP is inevitably accompanied by......
......"gross domestic by-products," including dirty air and polluted water, toxic waste, congestion, and noise.
Final goods are those purchased by end users, whereas intermediate goods are those.........
........purchased for resale or for further processing or manufacturing.
Economists define and measure economic growth as either....
...An increase in real GDP occurring over some time period. OR
An increase in real GDP per capita occurring over some time period
rule of 70
provides a quantitative grasp of the effect of economic growth. The rule of 70 tells us that we can find the number of years it will take for some measure to double, given its annual percentage increase, by dividing that percentage increase into the number 70.
modern economic growth
characterized by sustained and ongoing increases in living standards that can cause dramatic increases in the standard of living within less than a single human lifetime.
Substantial differences in GDP per capita among technologically advanced leader countries are often caused by.......
....... differences in the amount of labor supplied.
Strong property rights
These appear to be absolutely necessary for rapid and sustained economic growth. People will not invest if they believe that thieves, bandits, or a rapacious and tyrannical government will steal their investments or their expected returns.
Patents and copyrights
These are necessary if a society wants a constant flow of innovative new technologies and sophisticated new ideas. Before patents and copyrights were first issued and enforced, inventors and authors usually saw their ideas stolen before they could profit from them. By giving inventors and authors the exclusive right to market and sell their creations, patents and copyrights give a strong financial incentive to invent and create.
Efficient financial institutions
These are needed to channel the savings generated by households toward the businesses, entrepreneurs, and inventors that do most of society's investing and inventing. Banks as well as stock and bond markets appear to be institutions crucial to modern economic growth.
Literacy and widespread education
Without highly educated inventors, new technologies do not get developed. And without a highly educated workforce, it is impossible to implement those technologies and put them to productive use
Free trade promotes economic growth by allowing countries to specialize so that different types of output can be produced in the countries where they can be made most efficiently. In addition, free trade promotes the rapid spread of new ideas so that innovations made in one country quickly spread to other countries
A competitive market system
Under a market system, prices and profits serve as the signals that tell firms what to make and how much of it to make. Rich leader countries vary substantially in terms of how much government regulation they impose on markets, but in all cases, firms have substantial autonomy to follow market signals in deciding on current production and in making investments to produce what they believe consumers will demand in the future.
Four of the determinants of economic growth relate to the physical ability of the economy to expand. They are:
1. Increases in the quantity and quality of natural resources.
2. Increases in the quantity and quality of human resources.
3. Increases in the supply (or stock) of capital goods.
4. Improvements in technology.
The fifth determinant of economic growth is the.....
........demand factor. To achieve the higher production potential created by the supply factors, households, businesses, and government must purchase the economy's expanding output of goods and services.
The sixth determinant of economic growth is the ..
To reach its full production potential, an economy must achieve economic efficiency as well as full employment
labor-force participation rate
the percentage of the working-age population actually in the labor force
highways and bridges, public transit systems, wastewater treatment facilities, water systems, airports, educational facilities, and so on
economies of scale
Reductions in per-unit production costs that result from increases in output levels
Institutional structures that promote growth include strong property rights, patents, efficient financial institutions, education, and...........
..........a competitive market system.
The determinants of economic growth include four supply factors (increases in the quantity and quality of natural resources, increases in the quantity and quality of human resources, increases in the stock of capital goods, and improvements in technology); one demand factor (increases in total spending); and...
.....one efficiency factor (achieving allocative and productive efficiency).
Over long time periods, labor productivity growth determines an economy's growth of.......
........real wages and its standard of living
A nation's economic growth can be measured either as an increase in real GDP over time or.....
......as an increase in real GDP per capita over time
The growth of a nation's capacity to produce output can be illustrated graphically by .....
........an outward shift of its production possibilities curve
alternating rises and declines in the level of economic activity, sometime over several years.
In the trough of the recession or depression, output and employment..........
........ "bottom out" at their lowest levels
A recession is usually followed by a recovery ........
........and expansion, a period in which real GDP, income, and employment rise
Fluctuations in output and employment are caused by.......
....economic shocks combining with sticky prices
Sources of shocks that cause recessions include irregular innovation, productivity changes, monetary factors, political events, and ......
Changes over time in consumer demand and in technology alter the "structure" of the total demand for labor, both occupationally and geographically
Unemployment that is caused by a decline in total spending is called cyclical unemployment and typically begins in the recession phase of the business cycle. As the demand for goods and services decreases, employment falls and unemployment rises
a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before
When resources are already fully employed, the business sector cannot respond to excess demand by expanding output. So the excess demand bids up the prices of the limited output, producing demand-pull inflation. The essence of this type of inflation is "too much spending chasing too few goods."
The theory of cost-push inflation explains rising prices in terms of factors that raise per-unit production costs at each level of spending. A per-unit production cost is the average cost of a particular level of output
The underlying increases in the price level after volatile food and energy prices and removed
Inflation is a rising general level of prices and is measured as ........
........a percentage change in a price index such as the CPI
Demand-pull inflation occurs when total spending exceeds the economy's ability to provide goods and services at .......
....the existing price level
Cost-push inflation occurs when ..........
.........factors such as rapid increases in the prices of imported raw materials drive up per-unit production costs at each level of output
Core inflation is the underlying inflation rate after volatile food and energy prices have been ....
a measure of the amount of goods and services nominal income can buy; it is the purchasing power of nominal income, or income adjusted for inflation.
The effects of unanticipated deflation—declines in the price level—are the reverse of those ......
A person who is simultaneously an income earner, a holder of financial assets, and a debtor will probably find that the .......
.....redistribution impact of unanticipated inflation is cushioned
The nominal interest rate equals the real interest rate plus the .......
........inflation premium (the expected rate of inflation).
a schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each possible price level.
Aggregate demand reflects an inverse relationship between .........
.....the price level and the amount of real output demanded
Changes in the price level create real-balances, interest-rate, and.....
......foreign purchases effects that explain the downward slope of the aggregate demand curve.
The multiplier effect magnifies initial changes in spending into larger ..........
.....changes in aggregate demand
An increase in aggregate demand is shown as a rightward shift of the ........
.....aggregate demand curve
a schedule or curve showing the relationship between a nation's price level and the amount of real domestic output that firms in the economy produce. This relationship varies depending on the time horizon and how quickly output prices and input prices can change
The short-run aggregate supply curve (or simply the "aggregate supply curve") is ......
An increase in short-run aggregate supply is shown as a rightward shift of the aggregate supply curve; a decrease is shown as a......
The equilibrium price level and amount of real output are determined at the .........
.........intersection of the aggregate demand curve and the aggregate supply curve.
Increases in aggregate demand beyond the full-employment level of real GDP cause ......
Full employment, high economic growth, and price stability are compatible with one another if .......
....productivity-driven increases in aggregate supply are sufficient to balance growing aggregate demand.
The aggregate demand curve shows ....
...... the level of real output that the economy demands at each price level
Council of Economic Advisers (CEA),
a group of three economists appointed by the president to provide expertise and assistance on economic matters.
expansionary fiscal policy
This policy consists of government spending increases, tax reductions, or both, designed to increase aggregate demand and therefore raise real GDP.
contractionary fiscal policy
When demand-pull inflation occurs, a restrictive or contractionary fiscal policy may help control it. This policy consists of government spending reductions, tax increases, or both, designed to decrease aggregate demand and therefore lower or eliminate inflation.
To control demand-pull inflation, the government can decrease aggregate demand by reducing.....
Just as government can use tax cuts to increase consumption spending, it can use tax increases to reduce .....
..... consumption spending
Discretionary fiscal policy is the purposeful change of government expenditures and tax collections by government to promote.....
.....full employment, price stability, and economic growth.
Expansionary fiscal policy consists of increases in government spending, reductions in taxes, or both, and is designed to expand .....
.....real GDP by increasing aggregate demand.
Contractionary fiscal policy entails decreases in government spending, increases in taxes, or both, and is designed to reduce .....
.....aggregate demand and slow or halt demand-pull inflation.
To be implemented correctly, contractionary fiscal policy must properly account for the ratchet effect and the fact that the price level will not fall as the government shifts the aggregate demand curve ......
anything that increases the government's budget deficit (or reduces its budget surplus) during a recession and increases its budget surplus (or reduces its budget deficit) during an expansion without requiring explicit action by policymakers
Reductions in spending are desirable when the economy is moving toward inflation, whereas increases in spending are desirable when ......
...... the economy is slumping.
cyclically adjusted budget
The cyclically adjusted budget measures what the Federal budget deficit or surplus would have been under existing tax rates and government spending levels if the economy had achieved its full-employment level of GDP (its potential output). The idea essentially is to compare actual government expenditures with the tax revenues that would have occurred if the economy had achieved full-employment GDP. That procedure removes budget deficits or surpluses that arise simply because of cyclical changes in GDP and thus tell us nothing about whether the government's current discretionary fiscal policy is fundamentally expansionary, contractionary, or neutral.
a federal budget deficit that is caused by a recession and the consequent decline in tax revenues
The fiscal policies of state and local governments are frequently procyclical, meaning ......
.......that they worsen rather than correct recession or inflation
An expansionary fiscal policy (deficit spending) may increase the interest rate and reduce investment spending, thereby weakening or canceling the stimulus of the expansionary policy.
Automatic changes in net taxes (taxes minus transfers) add a degree of .....
......built-in stability to the economy
Cyclical deficits arise from declines in net tax revenues that automatically occur as the economy recedes and ......
......incomes and profits fall
The cyclically adjusted budget eliminates cyclical effects on net tax revenues; it compares actual levels of government spending to the .......
.......projected levels of net taxes that would occur if the economy were achieving its full-employment output
Time lags, political problems, expectations, and state and local finances complicate .......
...... fiscal policy
The crowding-out effect indicates that an expansionary fiscal policy may increase the interest rate and reduce ......
financial instruments issued by the Federal government to borrow money to finance expenditures that exceed tax revenues.
The U.S. public debt—$11.9 trillion in 2009—is essentially the total accumulation of all past ......
...... Federal budget deficits and surpluses
The Federal government is in no danger of going bankrupt because ......
...... it needs only to refinance (not retire) the public debt and it can raise revenues, if needed, through higher taxes.
•The borrowing and interest payments associated with the public debt may (a) increase income inequality; (b) require higher taxes, which may dampen incentives; and.......
.......(c) impede the growth of the nation's stock of capital through crowding out of private investment
1.Fiscal policy consists of deliberate changes in government spending, taxes, or some combination of both to promote ......
......full employment, price-level stability, and economic growth.
2.Built-in stability arises from net tax revenues, which vary directly with......
......the level of GDP
5.The Federal government responded to the deep recession of 2007-2009 by implementing ......
......highly expansionary fiscal policy
The public debt is the total accumulation of all past Federal government deficits and surpluses and consists of ......
......Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds
9.The concern that a large public debt may bankrupt the U.S. government is generally a false worry because (a) the debt needs only to be refinanced rather than refunded and ......
......(b) the Federal government has the power to increase taxes to make interest payments on the debt.
Medium of exchange
Any item sellers generally accept and buyers generally use to pay for a good or service, i.e. money
Unit of account
A standard unit in which prices can be stated and the value of the goods and services can be compared. 1 of 3 functions of money
the ease with which it can be converted quickly into the most widely accepted and easily spent form of money, cash, with little or no loss of purchasing power
Federal Reserve Notes
paper currency issued by the fed that eventually replaced all other types of federal currency
money market deposit account (MMDA)
an interest-bearing account containing a variety of interest-bearing short-term securities.
become available at their maturity. For example, a person can convert a 6-month time deposit ("certificate of deposit," or "CD") to currency without penalty 6 months or more after it has been deposited. In return for this withdrawal limitation, the financial institution pays a higher interest rate on such deposits than it does on its MMDAs. Also, a person can "cash in" a CD at any time but must pay a severe penalty.
money market mutual fund (MMMF)
offered by a mutual fund company. Such companies use the combined funds of individual shareholders to buy interest-bearing short-term credit instruments such as certificates of deposit and U.S. government securities. Then they can offer interest on the MMMF accounts of the shareholders (depositors) who jointly own those financial assets. The MMMFs in M2 include only the MMMF accounts held by individuals; those held by businesses and other institutions are excluded.
The narrow M1 definition of money includes currency held by the public plus ......
......checkable deposits in commercial banks and thrift institutions.
Thrift institutions as well as commercial banks offer accounts on which ......
......checks can be written
The M2 definition of money includes M1 plus savings deposits, including money market deposit accounts, small-denominated (less than $100,000) time deposits, and ......
......money market mutual fund balances held by individuals
The purchasing power of money is the amount of goods and services.....
.....a unit of money will buy
Rapid declines in the value of a currency may cause it to cease being used as.....
.....a medium of exchange
In the United States, all money consists essentially of the debts of government, commercial banks, and ......
These debts efficiently perform the functions of money as long as their value, or purchasing power, is ......
The value of money is rooted not in specified quantities of precious metals but in the amounts of goods, services, and ......
......resources that money will purchase.
The value of the dollar (its domestic purchasing power) is inversely related to .....
......the price level
Government's responsibility in stabilizing the purchasing power of the monetary unit calls for (a) effective control over the supply of money by the monetary authorities and.......
......(b) the application of appropriate fiscal policies by the president and Congress
subprime mortgage loans
high-interest-rate loans to home buyers with higher-than-average credit risk
the process of slicing up and bundling groups of loans, mortgages, corporate bonds, or other financial debts into distinct new securities.
Securitization is so widespread and so critical to the modern financial system that economists sometimes refer to it as ......
......the shadow banking system
Troubled Asset Relief Program (TARP),
which allocated $700 billion—yes, billion—to the U.S. Treasury to make emergency loans to critical financial and other U.S. firms. Most of this "bail-out" money eventually was lent out. In fact, as of March 2009, the Federal government and Federal Reserve had spent $170 billion just keeping insurer AIG afloat. Other major recipients of TARP funds included Citibank, Bank of America, JPMorgan Chase, and Goldman Sachs. Later, nonfinancial firms such as General Motors and Chrysler also received several billion dollars of TARP loans.
the tendency for financial investors and financial services firms to take on greater risks because they assume they are at least partially insured against losses
financial services industry
commercial banks, thrifts, insurance companies, mutual fund companies, pension funds, security firms, and investment banks
Wall Street Reform and Consumer Protection Act
This sweeping law includes provisions that:
Eliminate the Office of Thrift Supervision and give broader authority to the Federal Reserve to regulate all large financial institutions.
Create a Financial Stability Oversight Council to be on the lookout for risks to the financial system.
Establish a process for the Federal government to liquidate (sell off) the assets of large failing financial institutions, much like the FDIC does with failing banks.
Provide Federal regulatory oversight of mortgage-backed securities and other derivatives and require that they be traded on public exchanges.
Require companies selling asset-backed securities to retain a portion of those securities so the sellers share part of the risk.
Establish a stronger consumer financial protection role for the Fed through creation of the Bureau of Consumer Financial Protection.
Anything that is accepted as (a) a medium of exchange, (b) a unit of monetary account, and (c) a store of value can be ......
......used as money
2.There are two major definitions of the money supply. M1 consists of currency and checkable deposits; M2 consists of M1 plus savings deposits, including money market deposit accounts, small-denominated (less than $100,000) time deposits, and .....
.....money market mutual fund balances held by individuals.
9.The TARP loans and the Fed's lender-of-last-resort actions intensify the .....
....moral hazard problem
10.The main categories of the U.S. financial services industry are commercial banks, thrifts, insurance companies, mutual fund companies, pension funds, securities firms, and .....
11.In response to the financial crisis, Congress passed the .....
.....Wall Street Reform and Consumer Financial Protection Act of 2010
fractional reserve banking system
which only a portion (fraction) of checkable deposits are backed up by reserves of currency in bank vaults or deposits at the central bank
a statement of assets—things owned by the bank or owed to the bank—and claims on those assets.
an amount of funds equal to a specified percentage of the bank's own deposit liabilities
found by subtracting its required reserves from its actual reserves:
Excess reserves = actual reserves − required reserves
The United States has a fractional reserve banking system, in which the collective reserves of the banks usually are considerably less than 100 percent of ......
.....their checkable deposit liabilities
When a bank accepts deposits of cash, the composition of the money supply is changed, but.....
.....the total supply of money is not directly altered
Commercial banks and thrifts are obliged to keep required reserves equal to a specified percentage of their own checkable-deposit liabilities as cash or on deposit with.....
.....the Federal Reserve Bank of their district
The amount by which a bank's actual reserves exceed its required reserves is called .....
A bank that has a check drawn and collected against it will lose to the recipient bank both reserves and ......
......deposits equal to the value of the check.
New money is created when banks buy government bonds from the public; money disappears when banks sell .......
.......government bonds to the public
Banks balance profitability and safety in determining their mix of earning assets and ......
......highly liquid assets
Although the Fed pays interest on excess reserves, banks may be able to obtain higher interest rates by temporarily lending the reserves to other banks in the Federal funds market; the interest rate on such loans is the .......
......Federal funds rate
(or, less commonly, the checkable deposit multiplier) defines the relationship between any new excess reserves in the banking system and the magnified creation of new checkable-deposit money by banks as a group
A single bank in a multibank system can safely lend (create money) by an amount equal to its excess reserves; the banking system can lend (create money) by a.......
....... multiple of its excess reserves
The monetary multiplier is the reciprocal of the required reserve ratio; it is the multiple by which the banking system can expand the money supply for each......
......dollar of excess reserves
The monetary multiplier works in both directions; it applies to money destruction from the payback of loans as well as the ......
......money creation from the making of loans.
Modern banking systems are fractional reserve systems: Only a fraction of checkable deposits is backed by .......
The operation of a commercial bank can be understood through its balance sheet, where assets equal ......
...... liabilities plus net worth
asset demand for money.
People may hold their financial assets in many forms, including corporate stocks, corporate or government bonds, or money. To the extent they want to hold money as an asset, there is an asset demand for money.
•The total demand for money is the sum of the transactions and asset demands; it is graphed as an inverse relationship (downsloping line) between the interest rate and the....
...quantity of money demanded
The equilibrium interest rate is determined by money demand and supply; it occurs when people are willing to hold the exact amount of money.......
.......being supplied by the monetary authorities
consist of buying government bonds (U.S. securities) from or selling government bonds to commercial banks and the general public.
The fraction of checkable deposits that a bank must hold as reserves in a Federal Reserve Bank or in its own bank vault; also called the reserve requirement
Just as commercial banks charge interest on the loans they make to their clients, so too Federal Reserve Banks charge interest on loans they grant to commercial banks. The interest rate they charge is called the discount rate.
term auction facility
The Fed holds two auctions each month at which banks bid for the right to borrow reserves for 28-day and 84-day periods. For instance, the Fed might auction off $20 billion in reserves. Banks that want to participate in the auction submit bids that include two pieces of information: how much they wish to borrow and the interest rate that they would be willing to pay. As an example, Wahoo bank might want to borrow $1 billion and offer to pay an annual interest rate of 4.35 percent
The Fed has four main tools of monetary control, each of which works by changing the amount of reserves in the banking system: (a) conducting open-market operations (the Fed's buying and selling of government bonds to the banks and the public); (b) changing the reserve ratio (the percentage of commercial bank deposit liabilities required as reserves); (c) changing the discount rate (the interest rate the Federal Reserve Banks charge on loans to banks and thrifts); and .......
........(d) changing the amount of reserves it auctions to banks through the term auction facility.
Open-market operations are the Fed's monetary control mechanism of choice for routine increases or decreases in bank reserves over the business cycle; in contrast, changes in reserve requirements, aggressive changes in discount rates, and auctions of reserves are used ............
............only in special situations.
The Federal Reserve focuses monetary policy on the interest rate that it can directly influence: the .......
.........Federal funds rate
expansionary monetary policy
This policy will lower the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output.
prime interest rate
the benchmark interest rate used by banks as a reference point for a wide range of interest rates charged on loans to businesses and individuals.
The Fed conducts its monetary policy by establishing a targeted Federal funds interest rate—the rate that commercial banks charge one another for.........
.... overnight loans of reserves
An expansionary monetary policy (loose money policy) lowers the Federal funds rate, increases the money supply, and ..........
.........lowers other interest rates.
A restrictive monetary policy (tight money policy) increases the Federal funds rate, reduces the money supply, and ........
..........increases other interest rates.
The Fed uses it discretion in setting the Federal funds target rate, but its decisions regarding monetary policy and the target rate appear to be broadly consistent with .........
.......... the Taylor rule
Monetary policy may be highly effective in slowing expansions and controlling inflation but may be much less reliable in pushing the economy from a severe recession. Economists say that monetary policy may suffer from cyclical asymmetry
The Fed is engaging in an expansionary monetary policy when it increases the money supply to reduce interest rates and increase investment spending and real GDP; it is engaging in a restrictive monetary policy when it reduces the money supply to increase interest rates and.......
........reduce investment spending and inflation
•The Fed aggressively lowered the Federal funds interest rate following 9/11 and the 2001 recession and also during the .........
.......severe recession of 2007-2009.
The main strengths of monetary policy are (a) speed and flexibility and (b) political acceptability; its main weaknesses are (a) time lags and ........
..........(b) potential ineffectiveness during severe recession
The goal of monetary policy is to help the economy achieve price stability, full employment, and .........
The total demand for money consists of the transactions demand for money plus the ......
....asset demand for money
pertains to a culture's sense of beauty and good taste and is expressed in its art, drama, music, folklore, and dances
An aspect of Hinduism by which the entire society is divided into four groups (plus the outcasts) and each is assigned a certain class of work
All human-made objects; concerned with how people make things (technology) and who makes what and why (economics)
The side-by-side presence of technologically advanced and technologically primitive production systems
The technology (advanced, intermediate, or primitive) that most closely fits the society using it
Situation in which technology sold to companies in another nation is used to produce goods to compete with those of the seller of the technology
A foreign language used to communicate among a nation's diverse cultures that have diverse languages
Explain the significance of culture for international business.
To be successful in their relationships overseas, international businesspeople must be students of culture. They must not only have factual knowledge; they must also become culturally sensitive. Culture affects all functional areas of the firm.
Identify the sociocultural components of culture
Although experts differ about the components of culture, the following are representative of what numerous anthropologists believe exist: (1) aesthetics, (2) attitudes and beliefs, (3) religion, (4) material culture, (5) language, (6) societal organization, (7) education, (8) legal characteristics, and (9) political structures.
Discuss the two classes of relationships within a society.
A knowledge of how a society is organized is useful because the arrangement of relationships within it defines and regulates the manner in which its members interface with one another. Anthropologists have broken down societal relationships into two classes: those based on kinship and those based on free association of individuals.
Discuss Hofstede's four cultural value dimensions.
Geert Hofstede analyzed IBM employees in 72 countries and found that the differences in their answers to 32 statements could be based on four value dimensions: (1) individualism versus collectivism, (2) large versus small power distance, (3) strong versus weak uncertainty avoidance, and (4) masculinity versus femininity. These dimensions help managers understand how cultural differences affect organizations and management methods.
The number of available employees with the skills required to meet an employer's business needs
A procedure in which a firm scans the world for changes in the environmental forces that might affect it
economic data that serve as yardsticks for measuring the relative market strengths of various geographic areas
estimation by analogy
Process of using a market factor that is successful in one market to estimate demand in a similar market
Statistical technique by which successive observations of a variable at regular time intervals are analyzed to establish regular patterns that are used for establishing future values
Statistical technique that divides objects into groups so that the objects within each group are similar
A group of businesspeople and/or government officials (state or federal) that visits a market in search of business opportunities
A large exhibition, generally held at the same place and same time periodically, at which companies maintain booths to promote the sale of their products
Explain market indicators and market factors.
Market indicators are economic data used to measure relative market strengths of countries or geographic areas. Market factors are economic data that correlate highly with the market demand for a product.
Explain the difference between country screening and segment screening
If we utilize country screening, we assume that countries are homogeneous units (i.e., "everyone living in Mexico or Chad is essentially the same"). In segment screening, we focus our attention not on the nation as a homogeneous unit but on groups of people with similar wants and desires (market segments) across as well as within countries
The exporting of goods and services through various types of home-based exporters
A business established for the purpose of marketing goods and services, not producing them
A contractual arrangement in which one firm grants access to its patents, trade secrets, or technology to another for a fee
A form of licensing in which one firm contracts with another to operate a certain type of business under an established name according to specific rules
An arrangement by which one firm provides management in all or specific areas to another firm
An arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing
A cooperative effort among two or more organizations that share a common interest in a business enterprise or undertaking
Partnerships between (or among) competitors, customers, or suppliers that may take one or more of various forms, both equity and nonequity
export trading company (ETC)
A firm established principally to export domestic goods and services and to help unrelated companies export their products
Established international manufacturers that export other manufacturers' goods as well as their own
Firms that develop international trade and serve as intermediaries between foreign buyers and domestic sellers and vice versa
Explain the choice between market pioneer and fast follower.
A firm can succeed from any position, as the examples illustrate. In general, however, a follower is more likely to succeed if it has lots of resources. Smaller, less-well-financed followers are less likely to be successful
Explain the international market entry methods.
Methods of entering foreign markets can be assessed as non-equity- or equity-based situations. Nonequity-based modes of entry include indirect or direct exporting, turnkey projects, licensing, franchising, management contracts, and contract manufacturing. Equity-based modes of market entry include wholly owned subsidiaries, joint ventures, and strategic alliances
Marx's theory of a classless society, developed by his successors into control of society by the Communist Party and the attempted worldwide spread of communism
Government seizure of the property within its borders owned by foreigners, followed by prompt, adequate, and effective compensation paid to the former owners
Government seizure of the property within its borders owned by foreigners without payment to them
An economic system in which the means of production and distribution are for the most part privately owned and operated for private profit
Public, collective ownership of the basic means of production and distribution, operating for use rather than profit
A person, group, or party that wishes to minimize government activities and maximize private ownership and business
private international law
Laws governing transactions of individuals and companies that cross international borders
extraterritorial application of laws
A country's attempt to apply its laws to foreigners or nonresidents and to acts and activities that take place outside its borders
nonrevenue tax purposes
Purposes such as redistributing income, discouraging consumption of products such as tobacco and alcohol, and encouraging purchase of domestic rather than imported products
Treaties between countries that bind the governments to share information about taxpayers and cooperate in tax law enforcement; often called tax conventions
Standard that holds a company and its officers and directors liable and possibly subject to fines or imprisonment when their product causes death, injury, or damage
questionable or dubious payments
Bribes paid to government officials by companies seeking purchase contracts from those governments
multidomestic company (MDC)
An organization with multicountry affiliates, each of which formulates its own business strategy based on perceived market differences
global company (GC)
An organization that attempts to standardize and integrate operations worldwide in all functional areas
The purchase of sufficient stock in a firm to obtain significant management control
preferential trading arrangement
An agreement by a small group of nations to establish free trade among themselves while maintaining trade restrictions with all other nations
The way firms make choices about acquiring and using scarce resources in order to achieve their international objectives
The process by which an organization determines where it is going in the future, how it will get there, and how it will assess whether and to what extent it has achieved its goals
value chain analysis
An assessment conducted on the chain of interlinked activities of an organization or set of interconnected organizations, intended to determine where and to what extent value is added to the final product or service
The practices that organizations and their managers use for the identification, creation, acquisition, development, dispersion, and exploitation of competitively valuable knowledge
Knowledge that an individual has but that is difficult to express clearly in words, pictures, or formulae, and therefore difficult to transmit to others
Knowledge that is easy to communicate to others via words, pictures, formulae, or other means
A description of the company's desired future position if it can acquire the necessary competencies and successfully implement its strategy
A clear and concise description of the fundamental values, beliefs, and priorities of the organization's members
Plans for the best- or worst-case scenarios or for critical events that could have a severe impact on the firm
Broad guidelines intended to assist lower-level personnel in handling recurring issues or problems
Combines an openness to and an awareness of diversity across markets and cultures with a propensity and ability to synthesize across this diversity
As used here, related to hiring and promoting employees on the basis of the parent company's home-country frame of reference
As used here, related to hiring and promoting employees on the basis of the specific local context in which the subsidiary operates
As used here, related to hiring and promoting employees on the basis of the specific regional context in which the subsidiary operates
As used here, related to hiring and promoting employees on the basis of ability and experience without considering race or citizenship
parent-country national (PCN)
Employee who is a citizen of the nation in which the parent company is headquartered; also called home-country national
host-country national (HCN)
Employee who is a citizen of the nation in which the subsidiary is operating, which is different from the parent company's home nation
third-country national (TCN)
Employee who is a citizen of neither the parent company nation nor the host country
A situation in which a person doing international business can speak only his or her home language
Employee compensation payments added to base salaries because of higher expenses encountered when living abroad
For expatriate employees, packages that can incorporate many types of payments or reimbursements and must take into consideration exchange rates and inflation
Entitles the expatriate employee to all the allowances and bonuses applicable to the place of residence and employment
the portion of the total cost that does not depend on the production volume; this cost remains the same no matter how much is produced.
the rate of change of the total cost with respect to production volume, that is, the cost increase associated with a one-unit increase in the production volume
the rate of change of total revenue with respect to sales volume, that is, the increase in total revenue resulting from a one-unit increase in sales volume
Although physical in form, an analog model does not have a physical appearance similar to the real object or situation it represents.
Discrete probability distribution
Atable, graph, or equation describing the values of the random variable and the associated probabilities.
A weighted average of the values of the random variable, for which the probability function provides the weights. If an experiment can be repeated a large number of times, the expected value can be interpreted as the "long-run average."
Uniform probability distribution
A continuous probability distribution in which the probability that the random variable will assume a value in any interval of equal length is the same for each interval
Binomial probability distribution
The probability distribution for a discrete random variable, used to compute the probability of x successes in n trials
Poisson probability distribution
The probability distribution for a discrete random variable, used to compute the probability of x occurrences over a specified interval.
Normal probability distribution
A continuous probability distribution whose probability density function is bell-shaped and determined by the mean, µ, and standard deviation, σ.
Exponential probability distribution
Acontinuous probability distribution that is useful in describing the time to complete a task or the time between occurrences of an event
An uncertain future event affecting the consequence, or payoff, associated with a decision.
The result obtained when a decision alternative is chosen and a chance event occurs. A measure of the consequence is often called a payoff
States of nature
The possible outcomes for chance events that affect the payoff associated with a decision alternative.
A graphical device that shows the relationship among decisions, chance events, and consequences for a decision problem.
A measure of the consequence of a decision such as profit, cost, or time. Each combination of a decision alternative and a state of nature has an associated payoff (consequence).
A graphical representation of the decision problem that shows the sequential nature of the decision-making process
An approach to choosing a decision alternative without using probabilities. For a maximization problem, it leads to choosing the decision alternative corresponding to the largest payoff; for a minimization problem, it leads to choosing the decision alternative corresponding to the smallest payoff
An approach to choosing a decision alternative without using probabilities. For a maximization problem, it leads to choosing the decision alternative that maximizes the minimum payoff; for a minimization problem, it leads to choosing the decision alternative that minimizes the maximum payoff.
Minimax regret approach
An approach to choosing a decision alternative without using probabilities. For each alternative, the maximum regret is computed, which leads to choosing the decision alternative that minimizes the maximum regret.
Opportunity loss, or regret
The amount of loss (lower profit or higher cost) from not making the best decision for each state of nature.
Expected value approach
An approach to choosing a decision alternative based on the expected value of each decision alternative. The recommended decision alternative is the one that provides the best expected value
A measure of the total worth of a consequence reflecting a decision maker's attitude toward considerations such as profit, loss, and risk
Adecision maker who would choose a guaranteed payoff over a lottery with a better expected payoff.
The study of decision situations in which two or more players compete as adversaries. The combination of strategies chosen by the players determines the value of the game to each player
A condition that exists when pure strategies are optimal for both players in a two-person, zero-sum game. The saddle point occurs at the intersection of the optimal strategies for the players, and the value of the saddle point is the value of the game.
A forecast is simply a prediction of what will happen in the future. Managers must learn to accept the fact that, regardless of the technique used, they will not be able to develop perfect forecasts
Causal forecasting methods
are based on the assumption that the variable we are trying to forecast exhibits a cause—effect relationship with one or more other variables.