Macro-Econ Chapter 1-6

Effluent Fee

A charge to a polluter that gives the right to discharge into the air or water a certain amount of pollution; also called a pollution tax.

Majority Rule

A collective decision-making system in which group decisions are made on the basis of more than 50 percent of the vote. In other words, whatever more than half of the electorate votes for, the entire electorate has to accept.

Externality

A consequence of an economic activity that spills over to affect third parties. Pollution is an externality.

Unit tax

A constant tax assessed on each unit of a good that consumers purchase

Production Possibilities Curve (PPC)

A curve representing all possible combinations of maximum outputs that could be produced assuming a fixed amount of productive resources of a given quality.

Proportional Rule

A decision-making system in which actions are based on the proportion of the "votes" cast and are in proportion to them. In a market system, if 10 percent of the "dollar votes" are cast for blue cars, 10 percent of automobile output will be blue cars.

Monopoly

A firm that can determine the market price of a good. In the extreme case, a monopoly is the only seller of a good or service.

Government-sponsored Good

A good that has been deemed socially desirable through the political process. Museums are an example.

Government-inhibited Good

A good that has been deemed socially undesirable through the political process. Heroin is an example.

Demand Curve

A graphical representation of the demand schedule. It is a negatively sloped line showing the inverse relationship between the price and the quantity demanded (other things being equal).

Price Ceiling

A legal maximum price that may be charged for a particular good or service.

Price Floor

A legal minimum price below which a good or service may not be sold. Legal minimum wages are an example.

Black Market

A market in which goods are traded at prices above their legal maximum prices or in which illegal goods are sold.

Subsidy

A negative tax; a payment to a producer from the government, usually in the form of a cash grant per unit

Import Quota

A physical supply restriction on imports of a particular good, such as sugar. Foreign exporters are unable to sell in the United States more than the quantity specified in the import quota.

Free-rider Problem

A problem that arises when individuals presume that others will pay for public goods, so that, individually, they can escape paying for their portion without causing a reduction in production.

Demand

A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant

Supply

A schedule showing the relationship between price and quantity supplied for a specified period of time, other things being equal.

Shortage

A situation in which quantity demanded is greater than quantity supplied at a price below the market clearing price.

Surplus

A situation in which quantity supplied is greater than quantity demanded at a price above the market clearing price.

Scarcity

A situation in which the ingredients for producing the things that people desire are insufficient to satisfy all wants at a zero price.

Market Failure

A situation in which the market economy leads to too few or too many resources going to a specific economic activity.

Economic System

A society's institutional mechanism for determining the way in which scarce resources are used to satisfy human desires.

Tax bracket

A specified interval of income to which a specific and unique marginal tax rate is applied.

Excise tax

A tax levied on purchases of a particular good or service.

Regressive taxation

A tax system in which as more dollars are earned, the percentage of tax paid on them falls. The marginal tax rate is less than the average tax rate as income rises.

Progressive taxation

A tax system in which, as income increases, a higher percentage of the additional income is paid as taxes. The marginal tax rate exceeds the average tax rate as income rises.

Proportional taxation

A tax system in which, regardless of an individual's income, the tax bill comprises exactly the same proportion.

Minimum Wage

A wage floor, legislated by government, setting the lowest hourly rate that firms may legally pay workers.

Physical Capital

All manufactured resources, including buildings, equipment, machines, and improvements to land that are used for production.

Nonprice Rationing Devices

All methods used to ration scarce goods that are price-controlled. Whenever the price system is not allowed to work, nonprice rationing devices will evolve to ration the affected goods and services.

Market

All of the arrangements that individuals have for exchanging with one another. Thus we can speak of the labor market, the automobile market, and the credit market.

Transaction Cost

All of the costs associated with exchange, including the informational costs of finding out the price and quality, service record, and durability of a product, plus the cost of contracting and enforcing that contract.

Goods

All things from which individuals derive satisfaction or happiness.

Voluntary Exchange

An act of trading, done on an elective basis, in which both parties to the trade expect to be better off after the exchange.

Price System

An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities. The prices of those commodities are signals to everyone within the system about what is relatively scarce and what is relatively abundant.

Taxes

An increasing percentage of federal tax receipts is accounted for each year by taxes (other than income) levied on payrolls, such as Social Security taxes and unemployment compensation.

Normative Economics

Analysis involving value judgments about economic policies; relates to whether outcomes are good or bad. A statement of what ought to be.

Positive Economics

Analysis that is strictly limited to making either purely descriptive statements or scientific predictions; for example, "If A, then B." A statement of what is.

Production

Any activity that results in the conversion of resources into products that can be used in consumption

Inefficient Point

Any point below the production possibilities curve, at which the use of resources is not generating the maximum possible output.

Ad Valorem Taxation

Assessing taxes by charging a tax rate equal to a fraction of the market price of each unit purchased.

Chapter 3

Demand and Supply

Ceteris Paribus Conditions

Determinants of the relationship between price and quantity that are unchanged along a curve. Changes in these factors cause the curve to shift.

Retained earnings

Earnings that a corporation saves, or retains, for investment in other productive activities; earnings that are not distributed to stockholders.

Dynamic tax analysis

Economic evaluation of tax rate changes that recognizes that the tax base eventually declines with ever-higher tax rates, so that tax revenues may eventually decline if the tax rate is raised sufficiently.

Static tax analysis

Economic evaluation of the effects of tax rate changes under the assumption that there is no effect on the tax base, meaning that there is an unambiguous positive relationship between tax rates and tax revenues.

unit of analysis

Economists maintain that the unit of analysis is the individual. Members of a group are assumed to pursue their own goals rather than the group's objectives.

Chapter 4

Extensions of Demand and Supply Analysis

The law of demand states that at higher prices a lower quantity will be demanded than at lower prices, other things being equal.

For simplicity, things other than the price of the good itself are held constant. b. Buyers respond to changes in relative, not absolute, prices.

Chapter 6

Funding The Public Sector

Government/political Goods

Goods (and services) provided by the public sector; they can be either private or public goods.

Inferior Goods

Goods for which demand falls as income rises.

Normal Goods

Goods for which demand rises as income rises. Most goods are normal goods.

Public Goods

Goods for which the principle of rival consumption does not apply. They can be jointly consumed by many individuals simultaneously at no additional cost and with no reduction in quality or quantity. Also no one who fails to help pay for the good can be denied the benefit of the good.

Economic Goods

Goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price.

Private Goods

Goods that can only be consumed by one individual at a time. Private goods are subject to the principle of rival consumption.

Price Controls

Government-mandated minimum or maximum prices that may be charged for goods and services.

Collective Decision Making

How voters, politicians, and other interested parties act and how these actions influence nonmarket decisions.

two opposing answers.

In an economic system of centralized command and control, an authority such as the government decides how to answer the questions. . In a price system, the answers to the questions are determined by private parties, and prices signal to everyone which resources are relatively scarce and which resources are relatively abundant.

Antitrust Legislation

Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices.

Sources of Revenue

Major sources of revenue for states and local governments are sales, excise, and property taxes.

Services

Mental or physical labor or assistance purchased by consumers. Examples are the assistance of physicians, lawyers, dentists, repair personnel, housecleaners, educators, retailers, and wholesalers; items purchased or used by consumers that do not have physical characteristics.

Economics is broadly divided into microeconomics and macroeconomics.

Microeconomics studies decision making by individuals (or households) and by firms. Macroeconomics studies the behavior of the economy taken as a whole. It deals with such economy-wide phenomena as unemployment, the price level, and national income.

Transfer Payments

Money payments made by governments to individuals for which no services or goods are rendered in return. Examples are Social Security old-age and disability benefits and unemployment insurance benefits.

Third Parties

Parties who are not directly involved in a given activity or transaction.

Transfers in Kind

Payments that are in the form of actual goods and services, such as food stamps, subsidized public housing, and medical care, and for which no goods or services are rendered in return.

Rent Control

Price ceilings on rents

Labor

Productive contributions of humans who work.

Chapter 5

Public Spending and Public Choice

Empirical

Relying on real-world data in evaluating the usefulness of a model

Rent Controls and non price rationing

Rent controls are governmentally imposed price ceilings on rental apartments, which lead to predictable results. Nonprice rationing for apartments results.

Incentives

Rewards for engaging in a particular activity

Chapter 2

Scarcity and the World of Trade-offs

Models/Theories

Simplified representations of the real world used as the basis for predictions or explanations

Sales taxes

Taxes assessed on the prices paid on most goods and services.

Money Price

That price expressed in terms of today's dollars; also called the absolute or nominal price.

Chapter 1

The Nature of Economics

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost compared to other producers.

Absolute Advantage

The ability to produce more units of a good or service using a given quantity of labor or resource inputs. Equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs.

Human Capital

The accumulated training and education of workers.

Ceteris Paribus Assumption

The assumption that nothing changes except the factor or factors being studied

Rationality Assumption

The assumption that people do not intentionally make decisions that would leave them worse off.

Efficiency

The case in which a given level of inputs is used to produce the maximum output possible. Alternatively, the situation in which a given output is produced at minimum cost.

Marginal tax rate

The change in the tax payment divided by the change in income, or the percentage of additional dollars that must be paid in taxes. The marginal tax rate is applied to the highest tax bracket of taxable income reached.

Entrepreneurship

The component of human resources that perform the functions of raising capital, organizing, managing, and assembling other factors of production, making basic business policy decisions, and taking risks.

Market Deamns

The demand of all consumers in the marketplace for a particular good or service. The summation at each price of the quantity demanded by each individual.

Tax incidence

The distribution of tax burdens among various groups in society.

Government budget constraint Indicates

The government budget constraint indicates that government spending, transfers, and repayments of borrowed funds are limited to total taxes and user charges that the government collects during a given period.

Supply Curve

The graphical representation of the supply schedule; a line (curve) showing the supply schedule, which generally slopes upward (has a positive slope), other things being equal.

Opportunity Cost

The highest-valued, next-best alternative that must be sacrificed to attain something or to satisfy a want.

Government budget constraint

The limit on government spending and transfers imposed by the fact that every dollar the government spends, transfers, or uses to repay borrowed funds must ultimately be provided by the user charges and taxes it collects.

Relative Price

The money price of one commodity divided by the money price of another commodity; the number of units of one commodity that must be sacrificed to purchase one unit of another commodity.

Land

The natural resources that are available from nature. Land as a resource includes location, original fertility and mineral deposits, topography, climate, water, and vegetation

Capital loss

The negative difference between the purchase price and the sale price of an asset

Law of Supply

The observation that the higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal.

Law of Increasing Additional Cost

The observation that the opportunity cost of additional units of a good generally increases as people attempt to produce more of that good. This accounts for the bowed-out shape of the production possibilities curve.

Law of Demand

The observation that there is a negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant.

Specialization

The organization of economic activity so that what each person (or region) consumes is not identical to what that person (or region) produces. An individual may specialize, for example, in law or medicine. A nation may specialize in the production of coffee, e-book readers, or digital cameras.

Capital gain

The positive difference between the purchase price and the sale price of an asset. If a share of stock is bought for $5 and then sold for $15, the capital gain is $10.

Market Clearing/ Equilibrium

The price that clears the market, at which quantity demanded equals quantity supplied; the price where the demand curve intersects the supply curve.

Tax rate

The proportion of a tax base that must be paid to a government as taxes.

Principle of Rival Consumption

The recognition that individuals are rivals in consuming private goods because one person's consumption reduces the amount available for others to consume.

Property Rights

The rights of an owner to use and to exchange property.

Division of Labor

The segregation of resources into different specific tasks. For instance, one automobile worker puts on bumpers, another doors, and so on.

Equilibrium

The situation when quantity supplied equals quantity demanded at a particular price.

Theory of Public Choice

The study of collective decision making.

Microeconomics

The study of decision making undertaken by individuals (or households) and by firms.

Macroeconomics

The study of the behavior of the economy as a whole, including such economywide phenomena as changes in unemployment, the general price level, and national income.

Incentive Structure

The system of rewards and punishments individuals face with respect to their own actions.

Technology

The total pool of applied knowledge concerning how goods and services can be produced.

Average Tax Rate

The total tax payment divided by total income. It is the proportion of total income paid in taxes

Consumption

The use of goods or services for personal satisfaction.

Tax base

The value of goods, services, wealth, or incomes, subject to taxation.

Resources

Things used to produce goods and services to satisfy people's wants

Aggregates

Total amounts or quantities; aggregate demand, for example, is total planned expenditures throughout a nation.

Complements

Two goods are complements when a change in the price of one causes an opposite shift in the demand for the other.

Substitutes

Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change.

Economics is a social science involving the study of how people make choices to satisfy their wants.

Wants are all the things that people would consume if they had unlimited income. Because wants are unlimited and people cannot satisfy all their wants, individuals are forced to make choices about how to spend their income and how to allocate their time.

The three questions concern the problem of how to allocate society's scarce resources

What and how much will be produced? How will items be produced? For whom will items be produced?

Wants

What people would buy if their incomes were unlimited.

Some economists have proposed an approach known as behavioral economics

a. Behavioral economics emphasizes psychological limitations and complications that inhibit rational decision making by individuals. b. Proponents of behavioral economics have proposed the bounded rationality hypothesis, which suggests that near, but incomplete, rationality leads people to utilize basic rules of thumb to choose among alternatives.

The theory of public choice is the study of collective decision making.

a. Collective decision making involves the actions that voters, politicians, and other interested parties undertake to influence nonmarket choices. b. Market and collective decision making are similar in the sense that both involve competition for scarce resources and people motivated by self-interest. c. Market and collective decision making are different because the government goods are available for consumption at a price of zero, decisions about what government goods to provide are determined by majority rule, and government can use legally sanctioned force to ensure that its decisions are followed.

The corporate income tax is a moderately important source of revenue for the various governments in the U.S. economy.

a. Corporate stockholders are taxed twice: once on corporate income and again when dividends are received or when the stock is sold. b. The incidence of corporate taxes falls on people—consumers, workers, management, and stockholders—not on such inanimate objects as "corporations."

The demand schedule for a good is a set of pair of numbers showing various possible prices and the quantity demanded at each price, for some time period.

a. Demand must be conceived of as being measured in constant-quality units. b. A demand curve is a graphical representation of the demand schedule, and it is negatively sloped, reflecting the law of demand. c. A market demand curve for a particular good or service is derived by summing all the individual demand curves for that product

Because of scarcity, choice and opportunity costs arise.

a. Due to scarcity, people trade off options. b. The production possibilities curve (PPC) is a graph of the trade-offs inherent in a decision. i. When the amount of one resource or good that must be given up to produce an additional unit of another resource or good remains constant, the PPC is a straight line. ii. When the amount of one resource or good that must be given up to produce an additional unit of another resource or good rises, the PPC is bowed outward. iii. A point on a PPC is an efficient point. Points inside a PPC are inefficient. Points outside the PPC are unattainable (impossible), by definition.

Economics is a social science.

a. Economists develop models, or theories, which are simplified representations of the real world. b. Models help economists to understand, explain, and predict real-world economic phenomena. c. Like other social scientists, economists usually do not perform laboratory experiments. They typically examine what has already occurred in order to test their theories. d. Economic theories, like all scientific theories, are simplifications—and hence are "unrealistic." e. Economists, as do all scientists, employ assumptions. One important economic assumption is "all other things being equal." f. Models are evaluated on their ability to predict and not on the realism of assumptions. g. Economic models relate to behavior, not thought processes.

By graphing demand and supply on the same coordinate system, we can find equilibrium at the intersection of the two curves.

a. Equilibrium is a situation in which the plans of buyers and of sellers exactly coincide, so that there is neither excess quantity supplied nor excess quantity demanded. At the equilibrium price, quantity supplied equals quantity demanded. b. At a price below the equilibrium price, quantity demanded exceeds quantity supplied, and excess quantity demanded, or a shortage, exists. c. At a price above the equilibrium price, quantity supplied exceeds quantity demanded, and an excess quantity supplied, or a surplus, exists. d. Seller competition forces price down and eliminates a surplus. e. Buyer competition forces price up and eliminates a shortage.

When contemplating how to structure a system for taxing market transactions, governments must also consider how the taxes they impose affect market prices and equilibrium quantities.

a. Excise taxes are taxes on sales of specific commodities, and governments commonly levy certain excise taxes as a constant tax per unit sold, or a unit tax. b. Imposing a unit excise tax on a good or service reduces the net price that a producer receives for each unit sold by exactly the amount of the tax. Following assessment of a unit excise tax, a producer will continue to supply any given quantity only if the price received for that quantity is higher by exactly the amount of the tax. Thus levying a unit excise tax on sales of a good or service causes the market supply curve to shift upward by the amount of the tax. c. If the demand curve has its usual downward slope, the upward shift in the supply curve caused by imposing a unit excise tax causes the equilibrium quantity produced and consumed to decline. The market price rises by less than the amount of the tax. Producers pay part of the tax in the form of higher per-unit costs, and consumers pay the remainder of the tax when they purchase the item at the higher market price.

Governments use tax revenues to fund expenditures on public goods and government-sponsored goods, such as Medicare

a. Federal funding of health care services implies that effective prices that consumers pay for health care services are less than the prices that health care providers receive to provide those services, which explains the large quantities of health care services demanded and supplied under Medicare.. i. Because the government pays a per-unit subsidy for consuming a health care service covered by Medicare, the out-of-pocket expense that a Medicare recipient pays for each unit of service⎯the effective price to the consumer⎯is relatively low. Thus, the quantity of health care services demanded by Medicare patients is relatively large. ii. Suppliers of health care services are willing to provide the quantity of services demanded by Medicare patients, because the per-unit price they receive is equal to the out-of-pocket expense of Medicare patients plus the government subsidy. iii. The Medicare program's total expense for a particular health care service equals the per-unit subsidy times the quantity of the service demanded by Medicare patients. Taxpayers must fund this expense. b. In the absence of Medicare subsidies, the equilibrium prices and quantities of health care services both would be lower than they are with the subsidies provided by this federal program. i. This means that Medicare has encouraged increased consumption and production of health care services. ii. As a result, the total expense of the program⎯the per-unit government subsidy times the quantity of health care services demanded⎯is higher than the government estimated using equilibrium quantities as a guide. c. To try to contain overall federal spending on Medicare, the government often imposes reimbursement caps, or limits, on specific medical procedures. This can have the unintended effect of worsening patient care and driving the program's costs up even further.

The government has put price floors in several markets.

a. For many years, price supports created explicit minimum prices for agricultural goods, and in recent years some agricultural price supports have been explicitly created through mechanisms such as marketing loan programs. b. When the government sets minimum wages above the equilibrium, some unemployment is created. c. Governments sometimes restrict quantity directly through import quotas, which prohibit the importation of more than a specified quantity of a particular good in a one-year period.

The government performs political functions that also affect resource allocation.

a. Governments subsidize the production of government-sponsored goods and tax or prohibit the production of government-inhibited goods. b. By combining a progressive tax structure with transfer payments, the government attempts to redistribute income from higher to lower income groups (although many "loopholes" frustrate such a policy).

The government performs many economic functions that affect the way in which resources are allocated.

a. If a benefit or cost associated with an economic activity spills over to third parties, the price system will misallocate resources. A proper role for government is to correct such externalities. i. If a negative externality exists, the price system will overallocate resources to that industry. The government can correct this by taxing or regulating such activities. ii. If a positive externality exists, the price system will underallocate resources to that industry. The government can correct this by financing additional production, by providing special subsidies, or by regulation. b. A legal system that defines and enforces property rights is crucial to the U.S. capitalistic economy. c. Because a competitive price system transmits correct signals, an important role for government is to promote competition. d. A price system will underallocate resources to the production of public goods. i. Characteristics of public goods include the following: (1) They are usually indivisible. (2) They can be used by more people at no additional cost. (3) Additional users of public goods do not deprive others of any of the services of the good. (4) It is difficult to charge individual users a fee based on how much they themselves consume of the public good. ii. Because public goods must be consumed collectively, individuals have an incentive to take a free ride and not pay for them. iii. Because the price system underproduces public goods, a proper role of government may be to ensure their production. e. The U.S. government has taken on the economic role of ensuring economy-wide stability: full employment, price stability, and economic growth.

Price reflects relative scarcity and performs a rationing function.

a. If an input or output becomes less scarce (more scarce), its relative price will fall (rise). b. If governments prevent prices from rising to their equilibrium level, via a price control or ceiling, then goods cannot (legally) be allocated to the highest bidders and prolonged shortages result. Other forms of rationing emerge. c. During prolonged shortages, such nonprice rationing devices as cheating, long lines, firstcome first-served, political power, physical force, and other nonmarket forces arise. d. Governments also interfere in markets by putting price floors on price. For example, governments impose minimum wage rates, and they have put price floors on agricultural goods, which have caused surpluses.

Changes in demand and/or supply lead to changes in the equilibrium price and the equilibrium quantity.

a. If demand shifts to the right (left), given supply, then the equilibrium price rises (falls) and the equilibrium quantity rises (falls). b. If supply shifts to the right (left), given demand, then the equilibrium price falls (rises) and the equilibrium quantity rises (falls). c. When both supply and demand change, it is not always possible to predict the effects on the equilibrium price and the equilibrium quantity

Prices are not always perfectly flexible.

a. If prices are inflexible, published prices will not change very much, but hidden price increases through quality reductions might occur. b. Markets do not always move to equilibrium (given a change in demand or supply) immediately. Hence, shortages or surpluses can emerge in the short run.

Because individuals or communities do not have the resources to satisfy all their wants, scarcity exists.

a. If society can get all that it wants of good A when the price of good A is zero, good A is not scarce. b. If the price of good B is zero, and society cannot get all that it wants of good B, then B is scarce. c. Because resources, or factors of production, are scarce, the outputs they produce are scarce. i. Land, the natural resource, includes all the gifts of nature. ii. Labor, the human resource, includes all productive contributions made by individuals who work. iii. Physical capital, the man-made resource, includes the machines, buildings, and tools used to produce other goods and services. iv. Human capital includes the education and training of workers. v. Entrepreneurship includes the functions of organizing, managing, assembling, and risk taking necessary for business ventures. d. Goods include anything from which people derive satisfaction, or happiness. i. Economic goods are scarce. ii. Noneconomic goods are not scarce. iii. Services are intangible goods. e. Economists distinguish between wants and needs. The latter are objectively undefinable.

Specialization occurs because different individuals experience different costs when they engage in the same activities.

a. People have an economic incentive to specialize in producing an item for which they have a comparative advantage, or a lower opportunity cost of producing that item compared to other products. b. Absolute advantage, or the ability to produce more units of an item using a given amount of inputs, does not explain why people specialize and trade. Only comparative advantage matters. c. The process of division of labor increases output and permits specialization.

When governments attempt to fund their operations by taxing market activities, one issue they must consider is how the tax rates they assess relate to the tax revenues they ultimately receive.

a. Sales taxes are levied under a system of ad valorem taxation, meaning that the tax is applied to the value of final purchases of a good or service, as determined by its market price, which is the sales tax base. The total sales taxes collected by a government equal the sales tax rate multiplied by the sales tax base, so a sales tax is a proportional tax. b. Whereas static tax analysis indicates that a government can unambiguously increase its sales tax collections by boosting the sales tax rate, dynamic tax analysis takes into account the fact that higher tax rates give consumers an incentive to cut back on purchases of goods and services. Dynamic tax analysis indicates that at some point a further increase in the tax rate reduces the tax base sufficiently to result in lower tax revenues for the government. Consequently, in principle there is a single tax rate at which the government can collect the maximum possible revenues.

Education is another government-sponsored good that receives considerable public funding, which currently amounts to more than 5 percent of total U.S. national income

a. The basic economics of public funding of education is similar to the economics of public subsidies of health care programs such as Medicare. Public schools provide educational services at a price below the market price and provide the amount of services demanded at the below-market price as long as they receive sufficiently large per-unit subsidies from state and local governments. b. Measures of student performance have failed to increase even though public spending on education has risen. A possible explanation is that a higher per-pupil subsidy increases the difference between the per-student cost of providing educational services and the lower valuation of the services by parents and students. Thus, schools may have allocated resources to activities that have not necessarily enhanced learning.

Supply is the relationship between price and the quantity supplied, other things being equal.

a. The law of supply generally posits a direct, or positive, relationship between price and quantity supplied. i. As the relative price of a good rises, producers have an incentive to produce more of it. ii. As a firm produces greater quantities in the short run, a firm often requires a higher relative price before it will increase output. b. A supply schedule is a set of numbers showing prices and the quantity supplied at those various prices. c. A supply curve is the graphical representation of the supply schedule. It is positively sloped. d. By summing individual supply curves for a particular good or service, we derive the market supply curve for that good or service. e. The major determinants of supply are the prices of resources (inputs) used to produce the product, technology, taxes and subsidies, price expectations of producers, and the number of firms in an industry. f. Any change in the determinants of supply (listed in part e) causes a change in supply and therefore leads to a shift in the supply curve. g. A change in price, holding the determinants of supply constant, causes a movement along— but not a shift in—the supply curve.

Governments tax in order to obtain revenues to finance expenditures.

a. The marginal tax rate is the change in the tax payment divided by the change in income. b. The average tax rate equals the total tax payment divided by total income.

The federal government imposes income taxes on individuals and corporations, and it collects Social Security taxes and other taxes.

a. The most important tax in the U.S. economy is the personal income tax. Recently, some have proposed a consumption tax, which taxes people based on what they actually spend. b. The difference between the buying and selling price of an asset, such as a share of stock or a plot of land, is called a capital gain if a profit results, and a capital loss if it does not.

Economists assume that individuals are motivated by self-interest and respond predictably to opportunities for gain.

a. The rationality assumption is that individuals act as if they were rational. b. Self-interest often means a desire for material well-being, but it can also be defined to incorporate goals relating to love, friendship, prestige, power, and other human characteristics. c. By assuming that people act in a rational, self-interested way, economists can generate testable theories concerning human behavior.

Economic growth can be depicted through PPCs.

a. There is a trade-off between present consumption and future consumption. b. If a nation produces fewer consumer goods and more capital goods now, then it can consume more goods in the future than would otherwise be the case.

There are three main types of taxation systems.

a. Under a proportional taxation system, as a person's income rises, the percentage of income paid (rate of taxation) in taxes remains constant. b. Under a progressive taxation system, as a person's income rises, the percentage of income paid in taxes rises. c. Under a regressive taxation system, as a person's income rises, the percentage of income paid in taxes falls.

In a price system (free enterprise) voluntary exchange typically determines price. Buyers and sellers transact with a minimum amount of governmental interference.

a. Under a system of voluntary exchange, the terms of exchange (the terms, usually price, under which trade takes place) are set by the forces of supply and demand. b. Markets reduce transaction costs (all the costs associated with exchanging, including such costs associated with gathering information and enforcing contracts). c. Under voluntary exchange both buyers and sellers are presumed to benefit—otherwise the transactions would not continue.

The determinants of demand include all factors (other than the good's own price) that influence the quantity purchased.

a. When deriving a demand curve, other determinants of demand are held constant. When such ceteris paribus conditions affecting demand do change, the original demand curve shifts to the left or to the right. b. The major determinants of demand are consumers' income, tastes and preferences, changes in their expectations about future relative prices, the price of substitutes and complements for the good in question, and the number of buyers. c. A change in demand is a shift in the demand curve, whereas a change in quantity demanded is a movement along a given demand curve.

Behavioral Economics

an approach to the study of consumer behavior that emphasizes psychological limitations and complications that potentially interfere with rational decision making

Positive economics

is objective and scientific and deals with testable if this, then that hypotheses

Normative economics

is subjective and deals with value judgments, or with what ought to be.

Bounded Rationality

the hypothesis that people are nearly, but not fully, rational, so that they cannot examine every possible choice available to them but instead use simple rules of thumb to sort among the alternatives that happen to occur to them

Economics

the study of how people allocate their limited resources to satisfy their unlimited wants