Terms in this set (280)

1. protecting intellectual property with patents and copyrights: gives an incentive to engage
- patents (gives a firm the exclusive legal right to a new product for a period for 20 years from the date the patent was applied for)
- the patent system has drawbacks: in filing for a patent, a firm must disclose information about the product or process. This information enters the public record and may help competing firms develop products or processes that are similar but that do not infringe on the patent
^^ to avoid this problem a firm may try to keep the results of its research a trade secret without patenting it (famous example = formula for Coca-Cola)
- a product receives a patent protection, books, films and other artistic works receive copyright protection (under US law the creator of a book/film has the exclusive right to use the creation during the creator's lifetime, the heirs retain this exclusive right for 70 years after the creator's death)

2. subsidizing research and development: government conducts some research directly, the government also subsidizes research by providing grants to researchers in universities through the National Science Foundation and other agencies. Government also provides tax benefits to firms that invest in research and development

3. subsidizing education: if firms are unable to capture all the profits from research and development, they will pay lower wages and salaries to technical workers. These lower wages and salaries reduce the incentive to workers to receive this training.
- if the government subsidizes education, it can increase the number of workers who have technical training
- in US, provides free education from grades kindergarten through 12 and by providing support for public colleges and universities (also has student loans at reduced interest rates)
1. failure to enforce the rule of law: countries have abandoned centrally planned economies in favor of more market-oriented economies. For entrepreneurs in a market economy to succeed, the government must guarantee private property rights and enforce contracts. Unless entrepreneurs feel secure in their property, they will not risk starting a business.
- the rule of law: refers to the ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts
- many developing countries do not have functioning, independent court systems and even if one does exist a case may not be heard for many years (political favoritism and bribery of judges)

2. wars and revolutions: have experienced extended periods of war or violent changes of government
- ex: Afghanistan, Angola, Ethiopia, the Central African Republic and the Congo

3. poor public education and health: many low-income countries have weak public school systems so many workers are unable to read and write. Few workers acquire the skills necessary to use the latest technology
- many low-income countries suffer from diseases that are either nonexistent or treated readily in high-income countries
- people who are sick work less and are less productive when they do work

4. low rates of saving and investment: in most developing countries stock and bond markets do not exist and often the banking system is very weak. In high-income countries the funds that banks lend to businesses come from the savings of households. In developing countries many households barely survive on their incomes and therefore have little/no savings
1. contracts make some wages and prices "sticky"
- prices or wages are said to be sticky when they do not respond quickly to changes in demand or supply
- a steel mill might have signed a multi-year contract to buy coal, which is used in making steel, at a time when the demand for steel was stagnant. If steel demand and steel prices begin to rise rapidly, producing additional steel will be profitable because coal prices will remain fixed by contract
- if the managers of the coal companies had accurately predicted that would happen to prices the steel mill would have earned greater profits when prices rose

2. firms are often slow to adjust wages: many nonunion workers also have their wages or salaries adjusted only once a year
- if firms are slow to adjust wages, a rise in the price level will increase the profitability of hiring more workers and producing more output. A fall in the price level will decrease the profitability of hiring more workers and producing more output.
- firms are often slower to cut wages than to increase them. Cutting wages can have a negative effect on the morale and productivity of workers and can also cause some of a firm's best workers to quit and look for jobs elsewhere

3. menu costs make some prices sticky: firms base their prices today partly on what they expect future prices to be. For instance, before it prints menus, a restaurant has to decide the prices it will charge for meals. (many firms also print catalogs)
- changing prices would be costly because it would involve printing new menus or catalogs. The costs to firms of changing prices are menu costs.
- consider the effect of an unexpected increase in the price level. In this case, firms will want to increase the prices they charge. Some firms may not be willing to increase prices because of menu costs. Because of their relatively low prices, these firms will find their sales increasing which will cause them to increase output
1. increases in the labor force and in the capital stock: a firm will supply more output at every price if it has more workers and more physical capital. (In Japan, the population is aging, and the labor force is decreasing. Holding other variables constant, this decrease in the labor force causes the short-run aggregate supply curve in Japan to shift to the left.)

2. technological change: the productivity of workers and machinery increases, which means firms can produce more goods and services with the same amount of labor and machinery. This reduces the firms' costs of production allowing them to produce more at every price level.

3. expected changes in the future price level: if workers and firms believe that the price level is going to increase by 3 percent during the next year, they will try to adjust their wages and prices accordingly. In general, if workers and firms expect the price level to increase by a certain percentage, the SRAS curve will shift by an equivalent amount, holding constant all other variables that affect the SRAS curve

4. adjustments of workers and firms to errors in past expectations about the price level: workers and firms sometimes make incorrect predictions about the price level. As time passes they will attempt to compensate for these errors

5. unexpected changes in the price of an important natural resource: an unexpected event that causes the short-run aggregate supply curve to shift is known as a supply shock.
- supply shocks are often caused by an unexpected increases or decreases in the prices of important natural resources that can cause firms' costs to be different from what they had expected. Oil prices are a good example.
- oil. Some utilities also burn oil to generate electricity, so electricity prices will rise. Rising oil prices lead to rising gasoline prices, which raise transportation costs for many firms.
- because the US economy ha experienced at least some inflation every since since the 1930s, workers and firms always expect next year's price level to be higher than this year's price level. Holding everything else constant, expectations of a higher price level will cause the SRAS curve to shift to the left.