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Economics Final

STUDY
PLAY
Exam 1
Questions
In economics, the basic problem is
scarcity
Which of the following is not an example of a capital resource? A. Mineral Deposit B. Machinery C. factory D. agricultural land E. employee
E. employee
The know-how and the means and methods of production available within an economy are known as
technology
What measures the market value of all final goods and services produced within an economy during a specific time period?
gross domestic product (GDP)
In recent decades, China has been transitioning from a ______ economy to a _______ economy
In recent decades, China has been transitioning from a command economy to a market economy
In a pure market economy, coordination of resource-use decisions is made through
markets
(T/F) Per capita real GDP is simply real GDP divided by the number of acres of land within a given economy
False
(T/F) Efficiency in production or full employment of resources is implied when an economies output lies inside its production possibilities curve
False
(T/F) Labor resources consist only of the efforts of past and present union members available for use in production processes
False
In a pure command economy, resource decisions are made
through centralized planning
In the market economy, decision making is
decentralized
If a decrease in the price of Wege Broken Pretzels leads to a decrease in the demand for Diorites, Wege Broken Pretzels and Diorites must be
substitute goods
You get a high paying job. As a result of your increased income, you buy more Maryland Blue Crab. For you, Maryland Blue Crab is a
normal good
A few months later, you get a layoff notice. As a result of your lower income; you buy more Ramen Soup. For you, Ramen Soup is an
inferior good
The Law of Demand suggests that
the lower the price of a good, the larger will be the quantity demanded, other things being equal
(T/F) Private property rights are an important feature of pure market economies
True
(T/F) In pure command economies, resources are owned and/or controlled by the state (the government), so there is always enough for everyone
False
(T/F) WHen the entire demand curve shifts in to the right, economists say there had been an increase in quantity demanded
False
When economists say the demand for a product has decreased, this means that consumers are now willing to purchase less of that product at each alternative price
True
A maximum allowable price for a good or service is a
price ceiling
Give an example of a price floor
minimum wage
The Law of Diminishing Returns says as additional units of a variable input are added to a given amount of a fixed input, increases in output eventually will
decline (the additional employees in the McDonald's example, too crowded, or the factory example)
When there are no externalities, equilibrium in a market
maximizes social well-being
When a change in satisfaction happens for someone other than the direct consumer of an item, what exists?
an externality in consumption
The optimal level of pollution control occurs when
MSB of control just equals MSC
Exam 2
Questions
In a private education market, what happens as educational tuition decreases?
the number of years of education demanded increases
Consumption of education is said to create
positive externalities in consumption
To be socially optimal, education should be provided to the point where MSB ___ MSC
Marginal Social Benefit = Marginal Social Cost
(T/F) The marginal benefit of education increases as a student completes more years of education
False
(T/F) Without public schools, there would be no K-12 education
False
(T/F) Economic forces unleashed by increased competition in K-12 education are beneficial to our schools
True
(T/F) The move from illiteracy to literacy has high marginal benefits
True
Government has attempted to alleviate poverty through (name 4)
income support programs, health care support programs, food and nutrition assistance programs, and housing assistance programs
One of the unintended consequences of paying Government subsidies to the poor is that
incentives to work may be reduced
(T/F) Income effect causes poor workers to increase their hours of work when they receive cash welfare assistance
False
Economically speaking discrimination results in
an actual GDP that is below potential GDP
What factors often contribute to wage differentials in our economy?
following
1
workers exhibit different degrees of experience and skill
2
some workers are more productive than others
3
the level of demand varies across markets for different products
4
prices of different products vary tremendously in a market economy
(T/F) The poverty problem within the United States is mostly absolute poverty, rather than relative poverty
False
(T/F) Relative poverty will seldom exist in a market-based economy
False
(T/F) A result of employment discrimination may be that some qualified people are not hired because of non-economic considerations such as race and sex
True
Firms that coordinate their actions to maximize joint profits are said to have formed a
cartel
A market with only one buyer or employer is called a
monopsony
In a product market with a cartel, prices will be ____ and output will be ___ than in a competitive market
In a product market with a cartel, prices will be higher and output will be lower than in a competitive market
The average baseball player earns an average salary greater than the average college professor because
baseball players generate more revenue for their employers
(T/F) Tickets and broadcast rights to football gamer are bought and sold in the product market
True
(T/F) The shortage of teams in professional sports is a primary reason that teams often relocate to new cities
True
(T/F) Professional sports leagues, like the NFL and others, were formed to increase economic competition between the teams
False
Concentration ration is used to measure
monopoly power
Profits represent the difference between
total revenue and total cost
(T/F) Barriers to entry encourage the entry of more new firms into a market
False
Exam 3
Questions
Describe an economy experiencing inflation
there is a continuing rise in the general level of prices
When inflation redistributes income from one group to another, its an example of what effect?
equity
Who is most likely to be hurt by inflation?
people on fixed incomes
Money functions as (3 things)
a measure of value, a store of value, and a medium of exchange
(T/F) The money supply consists primarily of gold, silver, and other precious metals held by the Chinese
False
(T/F) The use of wage and price controls during inflation will likely be a permanent solution to the problem
False
(T/F) The discount rate of interest that Federal Reserve Banks charge consumers with good credit
False
(T/F) Demand-pull inflation involves increases in total consumer, investment, and government spending
True
Why is economic growth an important economic and social issue?
following 3
1
Economic growth leads to improvements in our standard of living
2
Lower levels of unemployment and poverty can be achieved through economic growth
3
A growing economy provides consumers with more choices and opportunities
A country has a comparative advantage in the production of any good that it can produce
with smaller opportunity cost than can other countries
(T/F) Protectionists argue that world output is greatest if all countries are free to engage in voluntary trade
False
(T/F) Everyone in the economy immediately experiences net benefits from free international trade
False
(T/F) Both tariffs and quotas result in higher prices and lower quantities for consumers
True
(T/F) The index of leading economic indicators is used by economists to trigger changes in economic performance over time
False
(T/F) Investments in capital goods increase the economy's ability to produce consumer goods in the future
False
Tax incidence is the
burden or final resting place of tax
government expenditures in the form of money payments to people who have not contributed to the current production of goods and services are
transfer payments
What term describes erratic short-run fluctuations in economic activity around the long run growth trend?
business cycle
What happens at the end of every period of economic expansion?
peak
(T/F) Hyperinflation is severe and prolonged inflation that results in the value of money losing its acceptability as a medium of exchange
True
(T/F) Exogenous theories postulate that factors outside the economic system are responsible for short run economic fluctuations
True
The economic experts you see confidently making predictions on TV business networks
might not really know as much about the economic future as they say they do
The M2 money supply includes M1 plus
savings and time deposits of small denomination and money-market mutual funds
(T/F) The psychological law of consumption states that when income changes, consumption changes, but by less than the change in income
True
(T/F) The labor force includes all persons who are able and willing to work regardless of age
False
Vocabulary
Following
Chapter 1
Alleviating Human Misery, The Role of Economic Reasoning
labor resources
the physical and mental efforts of an economy's people that are available to produce goods and services
capital resources
all nonhuman ingredients of production. Capital resources can be further divided into natural and man-made categories
technology
the know-how and the means and methods of production available within an economy
gross domestic product (GDP)
the market value of all final goods and services produced within an economy during a specific time period. GDP ignores the issue of whether ownership of the resources used for the production is domestic or foreign.
production possibilities curve
graphical representation of the maximum quantities of two goods and/or services that an economy can produce when its resources are used in the most efficient way possible
opportunity cost principle
the true cost of production an additional unit of a good or service is the value of other goods or services that must be given up to obtain it
increasing opportunity cost
as more of a particular good or service is produced, the cost in terms of other goods or services given up grows. This gives the production possibilities curve its bow shape
marginal social cost (MSC)
the true cost (opportunity cost) borne by society when the production of a good or service is increased by one unit.
marginal social benefit (MSB)
the true benefit to society of a one-unit increase in the production of a good or service
cost-benefit analysis
a technique for determining the optimal level of an economic activity. In general, an activity should be expanded so long as the expansion leads to greater benefits than costs.
real GDP
GDP in current dollars corrected for inflation. The correction requires dividing each year's GDP in current dollars by that year's price index, in decimal form.
per capital real GDP
Real GDP divided by population
per capital GDP
GDP in current dollars divided by population
Chapter 2
Economic Systems, Resource Allocation, and Social Well-Being, Lessons from China's Transition
pure market economy
economic system based on private ownership and control of resources, known as private property rights, and coordination of resource-use decisions through markets
pure command economy
economic system characterized by state ownership and/or control of resources and centralized resource-use decision making
mixed systems
economics that combine elements of the pure market and pure command economies
transitional economy
a nation which is in the process of replacing an economic system of command and control with one based on market principles
purely competitive market
a market in which there are a large number of mobile buyers and sellers of a standardized product. Further, the price of the product is free to move up or down, and there are no obstacles preventing firms from entering or leaving the market
purely monopolistic market
a market in which there is only one seller of a product. THe monopolist has substantial control over price and is often able to prevent potential sellers from entering the market
imperfectly competitive markets
markets that fall between the purely competitive and the purely monopolistic extremes; they may exhibit characteristics of either or both of these extremes
demand
the quantity of the product that consumers are willing to purchase at various prices, other things being equal
the other things that must be equal
are following
1
the consumers' incomes
2
the prices of goods related in consumption
3
the consumers' tastes
4
the consumers' expectations
5
the number of consumers
law of demand
the lower the price of a good, the larger will be the quantity demanded; and the higher the price, the smaller will be the quantity demanded, other things being equal.
change in quantity demanded
a movement along one demand curve, brought about by a change in the price of the product
change in demand
a shift to an entirely new demand curve, brought about by a change in one or more of the factors assumed to be held constant
normal good
a good whose demand increases as incomes rise adn decreases as incomes fall; caviare
inferior good
a good whose demand decreases as incomes rise and increases as incomes fall; Ramen Noodles
substitute goods
two goods for which an increase in the price of one leads to an increase in the demand for the other; Coke and Pepsi
complementary good
two goods for which an increase in the price of one leads to a fall in the demand for the other: headphones and iPods
supply
the quantity of a product that sellers are willing to sell at various prices, other things being equal.
the other things that must remain equal
are following
1
the cost of production
2
the prices of goods related in consumption
3
sellers' expectations
4
the number of sellers
law of supply
the higher the price of the product, the larger will be the quantity supplied; and the lower the price, the smaller will be the quantity supplied, other things being equal
change in the quantity supplied
a movement along one supply curve, brought about by a change in the price of the product
change in supply
a shift to an entirely new supply curve, brought about by a change in one or more of the factors assumed to be held constant.
equilibrium price
the price at which the sellers of a product wish to sell exactly the same amount as the consumers wish to buy. As such, the equilibrium price indicates when consumers feel that precisely the correct share of the economy's scarce resources is devoted to producing the product
equilibrium quantity purchased
the quantity of the product that is actually exchanged at the equilibrium price.
Chapter 3
Government Control of Prices in Mixed Systems, What Are the Actual Outcomes?
price ceiling
maximum allowable price for a good or service, usually set by a government; rent controls
price floor
a minimum allowable price for a good or service, typically set by a governmental unit or by a group of sellers; minimum wage
derived demand for labor
the demand for labor is said to be dependent on, or derived from, the demand for the product being produced
marginal revenue product of labor
the increase in revenue that accrues to the firm when an additional worker is hired; indicates the value of the worker to the firm
marginal product of labor
the increase in output due to hiring an additional worker
marginal revenue
the increase in revenue from selling an additional unit of the product
law of diminishing returns
as additional units of a variable input are added to a given amount of a fixed input, the resulting increases in output will eventually decline; McDonald's too many workers
substitution effect
the change in the hours of work that occurs in response to a wage change, other things being equal
income effect
a measure of the change in the hours of work that occurs when there is a change in income, other things being equal
Chapter 4
Pollution Problems, Must We Foul Our Own Nests?
marginal private benefit (MPB)
the benefit that accrues to the direct consumers of a good or service resulting from a one-unit increase in consumption as reflected in the demand curve for the good or service.
externality in consumption
a change in satisfaction, which can be either positive or negative, for someone other than the direct consumer of an item
marginal social benefit =
marginal private benefit +/- externality
marginal private cost (MPC)
the increase in total cost that producers incur when output is increased by one unit as reflected in the supply curve for the good or service
externality in production
the production of one good or service leading to cost changes, either positive or negative, in the production of other items
marginal social cost =
marginal private cost +/- externality
market failure
occurs when markets, operating on their own, do not lead to a socially optimal allocation of resources
explicit costs
the costs of production incurred by the producer to buy or hire the resources required to carry on business
implicit costs
the costs of production incurred by the producer for the use of self-owned, self-employed resources required to carry on business
pollution rights market
a market that exists when firms are allowed to buy and sell government issued licenses granting the holder the right to create a certain amount of pollution
Chapter 5
Economics of Crime and Its Prevention, How Much Is Too Much?
private goods and services
any good or service that satisfies both the exclusivity and rivalry conditions and thus gives satisfaction only to the direct consumer
semiprivate goods and services
any good or service that fails to fully satisfy either the exclusivity or rivalry condition and thus yields the primary benefit of consumption to the direct consumer, but also influences the satisfaction of others
public goods and services
a good or service that fails to satisfy both the exclusivity and rivalry conditions and thus, if provided to one, yields benefits to all.
free-rider
an individual who consumes the benefits from a public good or service but who pays no part of its cost
cost-benefit analysis
a technique for determining the optimal level of an economic activity by considering the relationship between the costs and the benefits of the activity. In general, and economic activity should be expanded so long as the resulting increase in benefits is at least as great as the resulting increase in costs.
equimarginal principle
an efficient allocation of a budget exists when the last dollar spent on any one facet of the budge yields the same marginal social benefit as the last dollar spent on any other facet
psychic income
benefits an individual receives from a business endeavor in the form of personal satisfaction rather than in the form of money
psychic costs
costs an individual incurs in pursuing a business in the form of negative personal satisfaction rather than in the form of money
Chapter 6
The Economics of Education, Crisis and Reform
Positive Externalities in Consumption
An increase in the satisfaction of one person caused by the consumption of a good or service by another person; education, especially K-12, is said to create such externalities
tuition subsidy
a payment made to families or schools by government to encourage additional investments in education; when externalities are present, a tuition subsidy equal in value to the gap between marginal private benefits and marginal social benefits should result in the optimal level of enrollment.
voucher programs
Programs designed to provide students in poor-performing public schools the opportunity to attend other schools and carry with them the state funding that the poor-performing school would have received for those students.
Charter Schools
Public schools created, controlled, and managed by parents or other organizations independent of the existing local school district. Charter schools are essentially privately operated, but publicly funded local schools.
Chapter 7
Poverty and Discrimination, Why Are So Many Still Poor?
Discrimination
The term means that equals are treated equally or unequals are treated equally
Chapter 8
The Economics of Big Business, Who Does What to Whom?
Concentration Ratio
The percentage of industry sales accounted for by the four largest firms in an industry; a measure of monopoly power
Marginal Revenue
The increase in revenue accruing to the firm from selling an additional unit of its product
Profits
The difference between total revenue and total cost; maximized by production the output at which marginal revenue equals marginal cost.
Deadweight Welfare Loss due to Monopoly
The reduction in social welfare due to the exercise of monopoly power.
Barriers to Entry
Impediments to the entry of new firms into a market, such as product differentiation and government licensing, usually used by monopolists to protect their favored positions.
Network Economies
Situation in which the value of a product to a consumer is enhanced when others also choose to consume the same product.
Average Cost
The ratio of total costs to units of output of a good or service. Also known as per-unit cost.
Economies of Scale
A situation that occurs when the average cost of producing a good or service falls as output is increased. Situation that occurs when long-run average cost can be reduced simply by increasing the firm's size and producing more of the product.
Diseconomies of Scale
A situation that occurs when the average cost of producing a good or service rises as output is increased. Situation that occurs beyond a certain size and production level, when average cost rises as production is increased.
Natural Monopoly
An industry in which the average cost of producing a product is minimized by having only one firm produce the product, the industry is said to be a natural monopoly.
Capture theory of Regulation
The belief that regulatory agencies, regardless of their initial intentions, eventually come to serve the interests of the firms being regulated rather than the interests of the general public.
Corporation
Firms organized as legal entities separate from their owners, the stockholders, who, by law, have limited liability.
Stock Options
Guarantees issued by a corporation which allow the holder to purchase a set number of shares at a fixed price, often called the strike price. Stock options are often used as a form of managerial compensation.
Chapter 9
The Economics of Professional Sports, What Is the Real Score?
Franchise
An exclusive right to produce and market specific commercial goods and services within a specified geographic territory.
Product Market
Buyers and sellers engage in the exchange of final goods and services.
Resource Markets
Buyers and sellers engage in the exchange of the factors of production.
Cartel
A group of firms which formally agree to coordinate their production and pricing decisions in a manner that maximizes joint profits.
Monopsony
A market with only one buyer or employer of a factor of production.
Marginal Cost of Labor (MCL)
Change that occurs in a firm's total labor costs due to hiring an additional worker, per unit of time.
Monopsonistic Profit
The difference between the workers' contribution to a monopsonistic firm's receipts and their wages.
Labor Union
A formal organization of workers that bargains on behalf of its members over the terms and conditions of employment.
Strike
A work stoppage initiated by labor.
Lockout
A work stoppage initiated by management.
Chapter 10
Competition in the Global Marketplace, Should We Protect Ourselves from International Trade?
consumption possibilities curve
graph of the maximum quantities of two goods and/or services that can be consumed in an economy when its resources are use efficiently
comparative advantage
the ability of a country to produce a good at a lower opportunity cost of producing the good than any other country
comparative disadvantage
the inability of a country to produce a good except at a higher opportunity cost of producing the good than another country
exchange rate
the price of one country's currency in terms of the monetary units of another country
tariff
a tax placed on internationally traded goods, usually imports
quota
a regulation that limits by law the quantity of specific foreign goods or services that may be imported during a period of time
import duties
tariff revenues
voluntary restraint agreement
an international treaty whereby one nation "volunteers" to restrict its exports of a product that it sells to another nation
embargo
government provision formally prevention one nation from trading goods and services with another nation or group of nations, intended to eliminate international trade between the countries in question
pegging
occurs when one nation imposes a fixed exchange rate for is currency in terms of another nation's currency
balance of payments deficit
shortage of foreign currency due to lower exports and higher imports caused by pegging
key industry
industry which is important to national security or health, needs to be protected from foreign competition by trade policies
infant industry
new industries producing cutting-edge products and services in an emerging market, needs to be protected from foreign competition by trade policies
dumping
an international trade practice in which a producer is selling abroad at a price below cost or below its domestic price
customs union
a free trade alliance of nations that share common external tariffs, European Union
euro
the cross-national currency of 13 European Union countries
free trade area
an alliance of nations without trade barriers between its members
Chapter 11
Economic Growth, Are We Living in a "New Economy"?
economic growth
a long-run process that results from a compounding of economic events over time
business cycle
an erratic short-run fluctuation in economic activity around the economy's long-run growth trend. Every business cycle has four distinct phases- expansion, peak, contraction, and trough.
expansion
the economy experiences a positive rate of growth
peak
end of an expansion, the level of economic output reaches a short-run relative high
contraction
decline in the level of economic activity and output
trough
economic output is at a short-run relative low
economic boom
exceptionally strong or prolonged expansion
recession
an exceptionally strong and prolonged contraction
productivity
the average amount of output that can be produced with a given set of inputs. It can be calculated as the ratio of output to input.
average product of labor
the total output of labor divided by the total number of labor units used in production. The average product of labor is a measure of labor productivity.
Chapter 12
Unemployment Issues, Why Do We Waste Our Labor Resources?
labor force
all non-institutionalized individuals 16 years of age and older who are employed for pay, actively seeking employment, or awaiting recall from a temporary layoff.
labor force participation rate
the percentage of the potential labor force population which actually belongs to the labor force
unemployment rate
the percentage of the labor force that is unemployed
discouraged workers
people not included in the official measures of unemployment because they have stopped actively searching for work and are no longer in the labor force
frictional unemployment
brief periods of unemployment usually originating on the labor supply side of the market; it is transitional, often in the form of people changing and searching for new jobs.
structural unemployment
unemployment that is caused by fundamental changes in demand for certain kinds of labor due to, say, technological changes or changes in consumers' tastes and preferences.
cyclical unemployment
unemployment caused by a contraction in aggregate demand or total spending in the economy
full-employment unemployment rate
the rate that reflects frictional and structural unemployment and is consistent with price stability, unemployment above this rate is bad
circular flow of economic activity
an overview of the operation of the economy
aggregate demand
a schedule showing output demanded at different price levels
output demanded
at any given price level is- the sum of the output of goods and services purchased by consumers, investors, and the government, and the net exports.
marginal propensity to consume (MPC)
the change in consumption divided by the change in income. A ratio that can be used to determine how much of a given increase in income a person spend
marginal propensity to save (MPS)
the change in saving divided by the change in income. A ratio that can be used to determine how much of a given increase in income a person will save.
psychological law of consumption
when income changes, consumption changes, but by less than the change in income
net exports
the difference between total exports and total imports.
trade deficit
occurs when the value of a nation's imports exceeds the value of the nation's exports.
trade surplus
occurs when the value of a nation's exports exceeds the value of the nation's imports.
spending multiplier
the reciprocal of 1 minus the marginal propensity to consume. Or the reciprocal of the marginal propensity to save.
aggregate supply
a schedule showing the quantity of output supplied in the economy at different price levels
leakages
withdrawals from an economy's circular flow which include savings, taxes, and imports.
injections
additions to an economy's circular flow which include investments, government spending, and exports.
Chapter 13
Inflation, How to Gain and Lose at the Same Time
inflation
a continuing rise in the general level of prices
consumer price index
includes commodities that city wage earners buy
wholesale price index
includes hundreds of commodities used by businesses
implicit price deflator
includes the components of the GDP
equity effects of inflation
the effects of inflation on the distribution of income
efficiency effects of inflation
the effects of inflation on the pattern of resource allocation
output effects of inflation
the effects of inflation on the level of production
hyperinflation
severe and prolonged inflation that results in the value of money losing its acceptability as a medium of exchange
pure inflation
inflation at full employment
medium of exchange
the use of money for the payment of goods and services and for the payment of debt
measure of value
the use of money to measure the value of goods and services
store of value
the sue of money as an asset to hold
M1
money supply including: currency and coins in circulation, nonbank traveler's checks, demand deposits, and other checkable accounts such as NOW accounts
M2
M1 plus savings and time deposits of small denomination and money-market mutual funds
required reserve ratio
the ratio of cash reserves to demand deposits that banks are required to maintain
excess reserves
reserves above what is required to meet he legal reserve requirement
promissory note
a piece of paper you sign when you get a loan that says you agree to pay back the loan plus interest
money multiplier
a numerical coefficient derived from the legal reserve ratio and equal to the reciprocal of the legal reserve ratio. The money multiplier multiplied by a change in excess cash reserves of banks gives the maximum change in the money supply.
open-market operations
the purchases and sales of government securities by the Federal Reserve Open Market Committee in order to control the growth in the money supply
discount rate
the rate of interest that the Federal Reserve Banks charge when banks borrow from the Fed
federal funds rate
the interest rate that banks charge other banks to borrow reserves
equation of exchange
an identity in which the money supply time velocity equals total spending (left-hand side) and the price level times the quantity of final goods and services produced equals the value of these goods and service produced (right-hand side).
MV = PQ
equation of exchange, see next four
M=
money supply
V=
income velocity of money or number of ties, on average, a dollar is used to buy final goods and services in a year
P=
price level or average price of final goods and services
Q=
quantity of final goods and services produced during a year
demand-pull inflation
increases in total consumer, investment, and government spending cause rightward shifts in the aggregate demand curve
cost-push inflation
increases in the costs of producing goods and services cause leftward shifts in the aggregate supply curve.
incomes policies
government policies designed to deal with cost-push inflationary pressures associated with imperfect labor and product markets by establishing wage and price ceilings, and some mechanism for their enforcement
Chapter 14
Government Spending, Taxation, and the National Debt, Who Wins and Who Loses?
tax equity
refers to the way taxes are distributed among people
transfer payments
government expenditures in the form of money payments to people who have not contributed to the current production of goods and services
government purchases of goods and services
expenditures for currently produced goods and services that are a part of the nation's income
equal tax treatment doctrine
taxpayers in the same economic circumstances should be treated equally
horizontal equity
people in identical economic circumstances pay an equal amount of taxes
vertical equity
taxpayers in different economic circumstances are treated unequally based on either the ability to pay or the benefits received
relative tax treatment doctrine
taxpayers in different economic circumstances should be treated unequally
ability-to-pay principle of taxation
taxes should be distribute among taxpayers based on the ability to pay taxes
benefits-received principle of taxation
taxes should be distributed among taxpayers based on the individual benefits received from government goods and services
excess tax burden
a measure of tax inefficiency; that is, it measures the non-neutral or the distortionary effects of the tax on relative prices and resource allocation
forward tax shifting
situation in which any part of a tax is paid for buy consumers in the form of higher prices
backward tax shifting
situation in which any part of the tax is paid for by the owners of resources in the form of lower resource prices
tax incidence
the burden or the final resting place of the tax
price elasticity of demand
the responsiveness of the quantity demanded of a product to changes in a product's price. measured as the percentage change in quantity demanded divided by the percentage change in price.
in-elasticity
when demand for a product does not change a lot when price changes
perfect price in-elasticity
when the demand for a product never changes when the price changes, results in a vertical demand curve. example- health care
elasticity
when the demand for a product is greatly effected by a change in price
perfect price elasticity
when the demand for a product disappears due to any change in price, results in a horizontal demand curve. example-100 pennies for a dollar
debt retirement
paying off debt
deficit spending
spending higher than your income.
Chapter 15
Social Security and Medicare, How Secure Is Our Safety Net for the Elderly?
private insurance
a contract whereby individuals agree to make payments, often called premiums, to a company in return for a guarantee of financial benefits in the event that some undesired circumstance occurs
social insurance
government programs, financed through tax revenues, that guarantee citizens financial benefits for events which are beyond an individual's control, such as old age, disability, and poor health
Social Security is officially called
OASDI Old Age, Survivors, and Disability Insurance Program
Fully funded insurance scheme
insurance program designed to provide benefits that are financed from the interest income earned on accumulated payments
pay-as-you-go scheme
insurance program designed to provide benefits that are financed from current payments
cost-of-living allowances (COLAs)
the Social Security COLA is equal to the amount of inflation experienced within the economy during the previous year as measured by the Consumer Price Index (CPI)
retirement effect
the incentive for workers to increase their saving behavior throughout their working lives because Social Security tends to increase the length of retirement
bequest effect
an increase in saving among people who wish to leave assets to their children as compensation for the losses incurred due to the burden of Social Security taxes
wealth substitution effect
the reduction in saving as workers substitute the wealth accumulated through participation in Social Security for other forms of private wealth
fee-for-service system
a system in which the buyers pay the cost of what they receive
managed care system
a health care system whereby payments to health care providers are based on a prearranged schedule of fixed fees that has been negotiated between the insurer and the providers
deductible
the portion of a health services bill that is the responsibility of the patient, not the health insurer
co-insurance
the percentage of the cost above the deductible that the patient is required to pay
prospective payment system
a health care program whereby the prices of services are fixed in advance by the insurer at a given amount for a given treatment
Economic Concepts
Chapters
Chapter 1
Alleviating Human Misery, The Role of Economic Reasoning
Labor resources
the physical and mental efforts of an economy's people that are available to produce goods and services
capital resources
all nonhuman ingredients of production. Capital resources can be further divided into natural and man-made categories
technology
the know-how and the means and methods of production available within an economy
production possibilities curve
graphical representation of the maximum quantities of two goods and/or services that an economy can produce when its resources are used in the most efficient way possible
opportunity cost
as more of a particular good or service is produced, the cost in terms of other goods or services given up grows. This gives the production possibilities curve its bow shape
opportunity cost principle
the true cost of production an additional unit of a good or service is the value of other goods or services that must be given up to obtain it
increasing opportunity costs
as more of a particular good or service is produced, the cost in terms of other goods or services given up grows. This gives the production possibilities curve its bow shape
marginal social cost
The true, or opportunity, cost borne by society when the production of a good or service is increased by one unit.
marginal social benefit
The true benefit to society of a one-unit increase in the production of a good or service.
cost-benefit analysis
a technique for determining the optimal level of an economic activity. In general, an activity should be expanded so long as the expansion leads to greater benefits than costs.
gross domestic product, current dollar
the market value of all final goods and services produced within an economy during a specific time period. GDP ignores the issue of whether ownership of the resources used for the production is domestic or foreign.
gross domestic product, real
GDP in current dollars corrected for inflation. The correction requires dividing each year's GDP in current dollars by that year's price index, in decimal form
gross domestic product, real per capita
Real GDP divided by population
gross domestic product, per capita
GDP in current dollars divided by population
price index numbers
the percent difference of GDP between two years. divide each year's average price level by the price level that existed in the base year, then multiply by 100
lesser developed country(LDC)
a country whose per capita real GDP is less than $6,500 per year
developed country
a country whose per capita real GDP is greater than $6,500 per year
Chapter 2
Economic Systems, Resource Allocation, and Social Well-Being, Lessons from CHina's Transition
economic systems
organizational arrangements that serve as a framework within which economic decisions are made
economic systems, mixed
economics that combine elements of the pure market and pure command economies
economy, pure market
economic system based on private ownership and control of resources, known as private property rights, and coordination of resource-use decisions through markets
economy, pure command
economic system characterized by state ownership and/or control of resources and centralized resource-use decision making
economy, transitional
a nation which is in the process of replacing an economic system of command and control with one based on market principles
market
exists when the buyers and sellers of a product or service interact with one another and engage in exchange
market, competitive
A market in which there are many sellers and many buyers of a good or service. No one buyer or seller is large enough to be able to affect the price of the product.
market, monopolistic
a market in which there is only one seller of a product. The monopolist has substantial control over price and is often able to prevent potential sellers from entering the market
market, imperfectly competitive
markets that fall between the purely competitive and the purely monopolistic extremes; they may exhibit characteristics of either or both of these extremes
demand
The set of quantities of a good or service per unit of time that buyers would be willing to purchase at various alternative prices of the item, other things being equal.
law of demand
the lower the price of a good, the larger will be the quantity demanded; and the higher the price, the smaller will be the quantity demanded, other things being equal.
quantity demanded, changes in
a movement along one demand curve, brought about by a change in the price of the product
demand, changes in
a shift to an entirely new demand curve, brought about by a change in one or more of the factors assumed to be held constant
supply
The set of quantities of a good or service per unit of time that sellers would be willing to place on the market at various alternative prices of the item, other things being equal.
law of supply
the higher the price of the product, the larger will be the quantity supplied; and the lower the price, the smaller will be the quantity supplied, other things being equal
quantity supplied, changes in
a movement along one supply curve, brought about by a change in the price of the product
supply, changes in
a shift to an entirely new supply curve, brought about by a change in one or more of the factors assumed to be held constant.
price, equilibrium
the price at which the sellers of a product wish to sell exactly the same amount as the consumers wish to buy. As such, the equilibrium price indicates when consumers feel that precisely the correct share of the economy's scarce resources is devoted to producing the product
shortage
occurs when the market is operating above equilibrium price
surplus
occurs when the market is operating below equilibrium price
Chapter 3
Government Control of Prices in Mixed Systems, What Are the Actual Outcomes?
price ceilings
maximum allowable price for a good or service, usually set by a government; rent controls
price floors
a minimum allowable price for a good or service, typically set by a governmental unit or by a group of sellers; minimum wage
rent controls
a law that sets a price control on the price of residential housing, it functions as a price ceiling
minimum wages
the lowest hourly, daily or monthly wage that employers may legally pay to employees or workers, serves as a price floor
derived demand (for labor)
the demand for labor is said to be dependent on, or derived from, the demand for the product being produced
marginal revenue product of labor
The change in revenue that occurs in response to hiring one additional worker. Serves as the firm's demand curve for labor.
marginal product of labor
the increase in output due to hiring an additional worker
marginal revenue
The change in the total revenue of a seller resulting from a one-unit change in the quantity sold of a good or service.
law of diminishing returns
as additional units of a variable input are added to a given amount of a fixed input, the resulting increases in output will eventually decline; McDonald's too many workers
substitution effect
the change in the hours of work that occurs in response to a wage change, other things being equal
income effect
a measure of the change in the hours of work that occurs when there is a change in income, other things being equal
Chapter 4
Pollution Problems, Must We Foul Our Own Nests?
demand
The set of quantities of a good or service per unit of time that buyers would be willing to purchase at various alternative prices of the item, other things being equal.
supply
The set of quantities of a good or service per unit of time that sellers would be willing to place on the market at various alternative prices of the item, other things being equal.
opportunity cost
as more of a particular good or service is produced, the cost in terms of other goods or services given up grows. This gives the production possibilities curve its bow shape
cost-benefit analysis
a technique for determining the optimal level of an economic activity. In general, an activity should be expanded so long as the expansion leads to greater benefits than costs.
marginal social costs
The true, or opportunity, cost borne by society when the production of a good or service is increased by one unit.
marginal social benefits
The true benefit to society of a one-unit increase in the production of a good or service.
externalities in consumption
An increase in the satisfaction of one person caused by the consumption of a good or service by another person
externalities in production
the production of one good or service leading to cost changes, either positive or negative, in the production of other items
market failure
Occurs when markets, operating on their own, do not lead to a socially optimal allocation of resources.
pollution rights markets
a market that exists when firms are allowed to buy and sell government issued licenses granting the holder the right to create a certain amount of pollution
Chapter 5
Economics of Crime and Its Prevention, How Much Is Too Much?
opportunity cost
as more of a particular good or service is produced, the cost in terms of other goods or services given up grows. This gives the production possibilities curve its bow shape
externalities in consumption
An increase in the satisfaction of one person caused by the consumption of a good or service by another person
private goods and services
any good or service that satisfies both the exclusivity and rivalry conditions and thus gives satisfaction only to the direct consumer
semiprivate goods and services
any good or service that fails to fully satisfy either the exclusivity or rivalry condition and thus yields the primary benefit of consumption to the direct consumer, but also influences the satisfaction of others
public goods and services
a good or service that fails to satisfy both the exclusivity and rivalry conditions and thus, if provided to one, yields benefits to all.
free-rider problem
an individual who consumes the benefits from a public good or service but who pays no part of its cost
cost-benefit analysis
a technique for determining the optimal level of an economic activity. In general, an activity should be expanded so long as the expansion leads to greater benefits than costs.
marginal social benefit
The true benefit to society of a one-unit increase in the production of a good or service.
marginal social cost
The true, or opportunity, cost borne by society when the production of a good or service is increased by one unit.
equimarginal principle
an efficient allocation of a budget exists when the last dollar spent on any one facet of the budge yields the same marginal social benefit as the last dollar spent on any other facet
psychic income
benefits an individual receives from a business endeavor in the form of personal satisfaction rather than in the form of money
psychic costs
costs an individual incurs in pursuing a business in the form of negative personal satisfaction rather than in the form of money
Chapter 6
The Economics of Education, Crisis and Reform
Demand
The set of quantities of a good or service per unit of time that buyers would be willing to purchase at various alternative prices of the item, other things being equal.
Supply
The set of quantities of a good or service per unit of time that sellers would be willing to place on the market at various alternative prices of the item, other things being equal.
Marginal Private Benefits
The benefit that accrues to the direct consumers of a good or service resulting from a one-unit increase in consumption. The MPB is reflected in the demand curve for the good or service.
Marginal Social Benefits
The true benefit to society of a one-unit increase in the production of a good or service.
Marginal Private Costs
The increase in total cost that producers incur when output is increased by one unit. The MPC is reflected in the supply curve for the good or service.
Marginal Social Costs
The true, or opportunity, cost borne by society when the production of a good or service is increased by one unit.
Externalities in Consumption
An increase in the satisfaction of one person caused by the consumption of a good or service by another person
Market Failure
Occurs when markets, operating on their own, do not lead to a socially optimal allocation of resources.
Chapter 7
Poverty and Discrimination, Why Are So Many Still Poor?
Poverty
when a person's household's annual pretax income is less than the government set threshold for the household's size and composition
Determinants of Income Distribution
age, race, and region
Income Inequality
comprises all disparities in the distribution of economic assets and income
Marginal Revenue Product of Labor
The change in revenue that occurs in response to hiring one additional worker. Serves as the firm's demand curve for labor.
Ownership Pattern of Resources
inheritance, luck, propensities to accumulate, or tendencies to save and accumulate resources
Discrimination
Treating equals unequally or unequals equally.
Unemployment
employment discrimination
Tax Policy
the government (the IRS)'s approach to taxation, in this context used to reduce poverty
Negative Income Tax
A government subsidy or cash payment to households that qualify because of having income below a minimum or guaranteed level.
Chapter 8
The Economics of Big Business, Who Does What to Whom?
Market, Monopolistic
A market in which there is a single seller of a good, service, or resource.
Market, Imperfectly Competitive
A market that falls between the limits of a competitive market on the one hand and a monopolistic market on the other. It contains elements of both.
Market, Competitive
A market in which there are many sellers and many buyers of a good or service. No one buyer or seller is large enough to be able to affect the price of the product.
Concentration Ratio
A measure of potential monopoly power, defined as the percentage of an industry's sales (or assets or output) controlled by the four (or eight) largest firms in the industry.
Demand
The set of quantities of a good or service per unit of time that buyers would be willing to purchase at various alternative prices of the item, other things being equal.
Demand Curve Facing a Firm
each individual firm has no price-setting capabilities and therefore faces the horizontal demand curve, the level of this curve is determined by the market price of the product
Marginal Revenue
The change in the total revenue of a seller resulting from a one-unit change in the quantity sold of a good or service.
Marginal Cost
The change in total costs resulting from a one-unit change in the output of a good or service.
Profit-Maximizing Output
The output per unit of time at which a firm's total revenue exceeds its total cost by the greatest possible amount. It is the output at which the firm's marginal cost equals its marginal revenue.
Supply
The set of quantities of a good or service per unit of time that sellers would be willing to place on the market at various alternative prices of the item, other things being equal.
Supply Curve of a Firm
the Marginal Cost curve for the firm is the Supply Curve for the firm
Marginal Social Benefit
The true benefit to society of a one-unit increase in the production of a good or service.
Marginal Social Cost
The true, or opportunity, cost borne by society when the production of a good or service is increased by one unit.
Deadweight Welfare Loss
The reduction in social satisfaction, or welfare, due to the tendency of monopolists to restrict output below the socially optimal level.
Entry Barriers
Impediments to the entry of new firms into a market, such as product differentiation and government licensing, usually used by monopolists to protect their favored positions.
Network Economies
Network economies exist when the value of a product to a consumer is enhanced when others also choose to consume the same product.
Non-price Competition
Competition among firms in matters other than product price. It usually takes the form of (1) advertising and (2) changes in design and quality of the product.
Average Cost
The ratio of total costs to units of output of a good or service. Also known as per-unit cost.
Economies of Scale
A situation that occurs when the average cost of producing a good or service falls as output is increased.
Diseconomies of Scale
A situation that occurs when the average cost of producing a good or service rises as output is increased.
Natural Monopoly
When the average cost of producing a product is minimized by having only one firm produce the product, the industry is said to be a natural monopoly.
Corporation
Firms organized as legal entities separate from their owners, the stockholders, who, by law, have limited liability.
Agency Problem
arises when the managers of the corporation pursue interests and goals that diverge from the interests and goals of the stockholders
Stock Options
Guarantees issued by a corporation which allow the holder to purchase a set number of shares at a fixed price, often called the strike price. Stock options are often used as a form of managerial compensation.
Chapter 9
The Economics of Professional Sports, What Is the Real Score?
Franchise
An exclusive right to produce and market specific commercial goods and services within a specified geographic territory.
Markets, Imperfectly Competitive
A market that falls between the limits of a competitive market on the one hand and a monopolistic market on the other. It contains elements of both.
Product Market
Buyers and sellers engage in the exchange of final goods and services.
Resource Markets
Buyers and sellers engage in the exchange of the factors of production.
Cartels
A group of firms which formally agree to coordinate their production and pricing decisions in a manner that maximizes joint profits.
Antitrust Laws
laws that make it illegal for rims to monopolize an industry through the formation of a cartel, professional sports is an exception
Demand and Supply
the demand and supply curves for sports
Marginal Revenue
The change in the total revenue of a seller resulting from a one-unit change in the quantity sold of a good or service.
Marginal Costs
The change in total costs resulting from a one-unit change in the output of a good or service.
Monopsony
A market with only one buyer or employer of a factor of production.
Supply of Labor
players must have certain skills and players are drafted and face immobility
Marginal Cost of Labor
Change that occurs in a firm's total labor costs due to hiring an additional worker, per unit of time.
marginal revenue
the increase in revenue from selling an additional unit of the product
Monopsonistic Profit
The difference between the workers' contribution to a monopsonistic firm's receipts and their wages.
Profit Maximization
a monopsony hires fewer workers than a competitive firm and pays a lower wage than a competitive firm
Chapter 10
Competition in the Global Marketplace, Should We Protect Ourselves from International Trade?
imports
goods and services brought in from one country to another country for use in trade
exports
goods and series transported from one country to another country for use in trade
production possibilities curve
graphical representation of the maximum quantities of two goods and/or services that an economy can produce when its resources are used in the most efficient way possible
consumption possibilities curve
graph of the maximum quantities of two goods and/or services that can be consumed in an economy when its resources are use efficiently
terms of trade
how much is imported per export
comparative advantage
the ability of a country to produce a good at a lower opportunity cost of producing the good than any other country
exchange rates
the price of one country's currency in terms of the monetary units of another country
demand
The set of quantities of a good or service per unit of time that buyers would be willing to purchase at various alternative prices of the item, other things being equal.
supply
The set of quantities of a good or service per unit of time that sellers would be willing to place on the market at various alternative prices of the item, other things being equal.
current account transactions
net amount a country is earning if it is in surplus, or spending if it is in deficit
capital account transactions
the net change in ownership of foreign assets
balance of trade(merchandise)
net earnings on exports - payments for imports
balance of payments deficit
shortage of foreign currency due to lower exports and higher imports caused by pegging
tariff
a tax placed on internationally traded goods, usually imports
quota
a regulation that limits by law the quantity of specific foreign goods or services that may be imported during a period of time
import duties
tariff revenues
voluntary restraint agreement
an international treaty whereby one nation "volunteers" to restrict its exports of a product that it sells to another nation
embargo
government provision formally prevention one nation from trading goods and services with another nation or group of nations, intended to eliminate international trade between the countries in question
dumping
an international trade practice in which a producer is selling abroad at a price below cost or below its domestic price
pegging
occurs when one nation imposes a fixed exchange rate for is currency in terms of another nation's currency
customs union
a free trade alliance of nations that share common external tariffs, European Union
euro
the cross-national currency of 13 European Union countries
free trade area
an alliance of nations without trade barriers between its members
Chapter 11
Economic Growth, Are We Living in a "New Economy"?
economic growth
a long-run process that results from a compounding of economic events over time
real gross domestic product
GDP in current dollars corrected for inflation. The correction requires dividing each year's GDP in current dollars by that year's price index, in decimal form
business cycle
an erratic short-run fluctuation in economic activity around the economy's long-run growth trend. Every business cycle has four distinct phases- expansion, peak, contraction, and trough.
expansion
the economy experiences a positive rate of growth
peak
end of an expansion, the level of economic output reaches a short-run relative high
contraction
decline in the level of economic activity and output
trough
economic output is at a short-run relative low
economic boom
exceptionally strong or prolonged expansion
economic recession
an exceptionally strong and prolonged contraction
leading economic indicators index
tool used to forecast changes in economic growth, it is a composite index of economic variables that tend to move in the same direction as overall economic output but do so prior to changes in real GDP
labor
quantity of labor is a determinant of economic growth
capital
quantity of capital is a determinant of economic growth
productivity
the average amount of output that can be produced with a given set of inputs. It can be calculated as the ratio of output to input.
average product of labor
the total output of labor divided by the total number of labor units used in production. The average product of labor is a measure of labor productivity.
human capital
a worker's investment in education and training, enhancing the quality of labor
technology
the know-how and the means and methods of production available within an economy
investment
saving rather than investing is contributing to the recent economic slowdown
Chapter 12
Unemployment Issues, Why Do We Waste Our Labor Resources?
labor force
all non-institutionalized individuals 16 years of age and older who are employed for pay, actively seeking employment, or awaiting recall from a temporary layoff.
labor force participation rate
the percentage of the potential labor force population which actually belongs to the labor force
unemployment rate
the percentage of the labor force that is unemployed
discouraged workers
people not included in the official measures of unemployment because they have stopped actively searching for work and are no longer in the labor force
frictional unemployment
brief periods of unemployment usually originating on the labor supply side of the market; it is transitional, often in the form of people changing and searching for new jobs.
structural unemployment
unemployment that is caused by fundamental changes in demand for certain kinds of labor due to, say, technological changes or changes in consumers' tastes and preferences.
cyclical unemployment
unemployment caused by a contraction in aggregate demand or total spending in the economy
full-employment unemployment rate
the rate that reflects frictional and structural unemployment and is consistent with price stability, unemployment above this rate is bad
circular flow of production and income
overview of the operation of the entire economy
aggregate demand
a schedule showing output demanded at different price levels
marginal propensity to consume (MPC)
the change in consumption divided by the change in income. A ratio that can be used to determine how much of a given increase in income a person spend
marginal propensity to save (MPS)
the change in saving divided by the change in income. A ratio that can be used to determine how much of a given increase in income a person will save.
psychological law of consumption
when income changes, consumption changes, but by less than the change in income
spending multiplier
the reciprocal of 1 minus the marginal propensity to consume. Or the reciprocal of the marginal propensity to save.
aggregate supply
a schedule showing the quantity of output supplied in the economy at different price levels
leakages
withdrawals from an economy's circular flow which include savings, taxes, and imports.
injections
additions to an economy's circular flow which include s, government spending, and exports.
aggregate demand policies
policies that focus on stabilizing aggregate demand at a high level of employment and production
aggregate supply policies
policies that attempt to increase aggregate supply
Chapter 13
Inflation, How to Gain and Lose at the Same Time
inflation
a continuing rise in the general level of prices
price index numbers
the percent difference of GDP between two years. divide each year's average price level by the price level that existed in the base year, then multiply by 100
equity effects of inflation
the effects of inflation on the distribution of income
efficiency effects of inflation
the effects of inflation on the pattern of resource allocation
hyperinflation
severe and prolonged inflation that results in the value of money losing its acceptability as a medium of exchange
money supply
composed of assets that are 100% liquid
liquid
you do not have to sell money in order to buy other assets
creating money
checkable and debit-able deposits
money multiplier
a numerical coefficient derived from the legal reserve ratio and equal to the reciprocal of the legal reserve ratio. The money multiplier multiplied by a change in excess cash reserves of banks gives the maximum change in the money supply.
required reserve ratio
the ratio of cash reserves to demand deposits that banks are required to maintain
discount rate
the rate of interest that the Federal Reserve Banks charge when banks borrow from the Fed
open-market operations
the purchases and sales of government securities by the Federal Reserve Open Market Committee in order to control the growth in the money supply
federal funds rate
the interest rate that banks charge other banks to borrow reserves
equation of exchange
an identity in which the money supply time velocity equals total spending (left-hand side) and the price level times the quantity of final goods and services produced equals the value of these goods and service produced (right-hand side).
quantity theory of money
approach taken to explain the causes of inflation and possible methods of stopping it, see equation of exchange
demand-pull inflation
increases in total consumer, investment, and government spending cause rightward shifts in the aggregate demand curve
cost-push inflation
increases in the costs of producing goods and services cause leftward shifts in the aggregate supply curve.
incomes policy
government policies designed to deal with cost-push inflationary pressures associated with imperfect labor and product markets by establishing wage and price ceilings, and some mechanism for their enforcement
Chapter 14
Government Spending, Taxation, and the National Debt, Who Wins and Who Loses?
government purchases
expenditures for currently produced goods and services that are a part of the nation's income
government transfer payments
government expenditures in the form of money payments to people who have not contributed to the current production of goods and services
public goods
a good or service that fails to satisfy both the exclusivity and rivalry conditions and thus, if provided to one, yields benefits to all
external benefits and costs
externalizes created by government provision of goods and services
equal tax treatment doctrine
taxpayers in the same economic circumstances should be treated equally
horizontal equity
people in identical economic circumstances pay an equal amount of taxes
vertical equity
taxpayers in different economic circumstances are treated unequally based on either the ability to pay or the benefits received
relative tax treatment doctrine
taxpayers in different economic circumstances should be treated unequally
ability-to-pay principle of taxation
taxes should be distribute among taxpayers based on the ability to pay taxes
progressive tax rates
when the rate of taxation is rising as income rises
proportional tax rates
when the rate of taxation is constant as income rises
benefits-received principle of taxation
taxes should be distributed among taxpayers based on the individual benefits received from government goods and services
tax efficiency
concerned with the administration and compliance costs of taxes, taxes should be economical to collect and to enforce
forward tax shifting
situation in which any part of a tax is paid for buy consumers in the form of higher prices
backward tax shifting
situation in which any part of the tax is paid for by the owners of resources in the form of lower resource prices
price elasticity of demand
the responsiveness of the quantity demanded of a product to changes in a product's price. measured as the percentage change in quantity demanded divided by the percentage change in price.
tax incidence
the burden or the final resting place of the tax
government borrowing
increases the demand for loanable funds and therefore increases the price of lovable funds, that is, the rate of interest
government debt repayment
paying off debt
Chapter 15
Social Security and Medicare, How Secure Is Our Safety Net for the Elderly?
private insurance
a contract whereby individuals agree to make payments, often called premiums, to a company in return for a guarantee of financial benefits in the event that some undesired circumstance occurs
social insurance
government programs, financed through tax revenues, that guarantee citizens financial benefits for events which are beyond an individual's control, such as old age, disability, and poor health
fully funded insurance scheme
insurance program designed to provide benefits that are financed from the interest income earned on accumulated payments
pay-as-you-go insurance scheme
insurance program designed to provide benefits that are financed from current payments
cost-of-living allowances (COLAs)
the Social Security COLA is equal to the amount of inflation experienced within the economy during the previous year as measured by the Consumer Price Index (CPI)
substitution effect
the change in the hours of work that occurs in response to a wage change, other things being equal
income effect
a measure of the change in the hours of work that occurs when there is a change in income, other things being equal
retirement effect
the incentive for workers to increase their saving behavior throughout their working lives because Social Security tends to increase the length of retirement
bequest effect
an increase in saving among people who wish to leave assets to their children as compensation for the losses incurred due to the burden of Social Security taxes
wealth substitution effect
the reduction in saving as workers substitute the wealth accumulated through participation in Social Security for other forms of private wealth
fee-for-service system
a system in which the buyers pay the cost of what they receive
managed care system
a health care system whereby payments to health care providers are based on a prearranged schedule of fixed fees that has been negotiated between the insurer and the providers
deductible
the portion of a health services bill that is the responsibility of the patient, not the health insurer
co-insurance
the percentage of the cost above the deductible that the patient is required to pay
prospective payment system
a health care program whereby the prices of services are fixed in advance by the insurer at a given amount for a given treatment