Chapter 5: Government's Role and Government Failure, Chapter 5 Government's Role and Government Failure, ch5 test
What is macroeconomics concerned with?
Macroeconomics is the part of economics concerned with the economy as a whole and decision making by large units.
where is the optimal output on a graph
Mc=Mb
What is microeconomics concerned with?
Micro economics deals with specific things inside economics
In economic terms what does "utility" mean
Pleasure or satisfaction
what does consumer sovereignty mean?
Producers produce what households want to consume.
Economists content that most economic decisions are_______________.
Purposeful
Utility
Ability or capacity of a good or service to be useful and give satisfaction to someone.
Mutually agreeable
Economic transactions willingly undertaken by both the buyer and the seller because each feels that the transaction will make him or her better off
The only taxes levied by the government are to pay for national defense, law enforcement, and a legal system designed to enforce contracts between private citizens
Laissez-faire system
macro or micro : U.S. output adjusted for inflation, increased by 2-4 percent in 2014.
Macro
principal-agent problems
(1) at a firm, a conflict of interest that occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals' (stockholders') goals; (2) in public choice theory, a conflict of interest that arises when elected officials (who are the agents of the people) pursue policies that are in their own interests rather than policies that would be in the better interests of the public (the principals)
what is the circular flow model
1- rent, wages, interest projects 2- land, labor 3- goods and services 4- revenue and consumption
what are the two characteristics that make economic systems differ
1. degree of decentralized use of market 2. degree of centralized government control
What is a budget line
A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices.
What is economics defined as?
A social science concerned with making optimal choices under conditions of scarcity
What is a positive statement?
A statement that includes statistics and can be backed by statics. Ex-
Opprotunity Cost
The cost of the next best use of your time or money when you choose to do one thing over another
Freedom of enterprise
The freedom of firms to obtain economic resources, decide what products to produce with those resources, and sell those products in markets of their choice
Freedom of choice
The freedom of resource owners to dispose of their resources as they think best; of workers to enter any line of work for which they are qualified; and of consumers to spend their incomes in whatever way they feel is most appropriate
Competition
The presence in a market of independent buyers and sellers who compete with one another and who are free to enter and exit the market as they each see fit
Private property
The right of private persons and firms to obtain, control, employ, dispose of, and bequeath land, capital, and other property
Self-interest
What each individual or firm believes is best for itself and seeks to obtain
what are the five fundamental questions
What will be produced? How will goods and services be produced? Who will get the output? How will the system accommodate change? How will the system promote progress?
What is creative destruction?
When new products and production methods destroy the market position or firms that are not willing to adjust.
monetary policy
a central bank's changing of the money supply to influence interest rates and assist the economy in achieving price-level stability, full employment, and economic growth
unfunded liability
a future government spending commitment (liability) for which the government has not legislated an offsetting revenue source
regulatory capture
a government agency regulations and enforcement activities come to be heavily influenced by the industry that it is supposed to be regulating
pork-barrel politics
a means of securing a government project that yields benefits mainly to a single political district and its political representative
paradox of voting
a situation where paired-choice voting by majority fails to provide a consistent ranking of society's preferences for public goods or public services
What is a normative statement?
a statement that includes a value judgement and cannot be refuted just by looking at the evidence Ex-
median-voter model
a theory that states "a majority rule voting system will select the outcome most preferred by the median voter"
loan guarantees
a type of investment subsidy in which the government agrees to guarantee (pay off) the money borrowed by a private company to fund investment projects if the private company fails to repay the loan
1 key difference between the economic activities of government and those of private firms is that
the government posses the legal right to force people to do things
debt crisis
an economic crisis in which government debt has risen so high that the government is unable to borrow any more money due to people losing faith in the government's ability to repay; leads to either massive spending cuts or large tax increases, either of which will likely plunge the economy into a recession
marginal analysis
analysis that involves comparing marginal benefits and marginal costs
special-interest effect
any outcome of the political process whereby a small number of people obtain a government program or policy that gives them large gains at the expense of a much greater number of persons who individually suffer small losses
special-interest effect
any political outcome in which a small group ("special interest") gains substantially at the expense of a much larger number of persons who each individually suffers a small loss
what does the law of increasing opportunity state
as more of a particular good is produced it's marginal opportunity cost increases
monetary policy
attempts to use changes in interest rates to regulate economy
fiscal policy
attempts to use changes in tax rates and spending levels to offset the business cycle
fiscal policy
changes in government spending and tax collections designed to achieve full employment, price stability, and economic growth; also called discretionary fiscal policy
A woman who wants to start a flower shop finds she cannot do so unless the central government has already decided to allow a flower shop in her area
command system
principal-agent problems
conflicts that arise when tasks are delegated by one group of people (principals) to another group of people (agents)
circular flow model- bottom right corner (blue line)
consumption expenditures
circular flow model- Top left corner (blue line)
cost
circular flow model- bottom left corner (red line)
goods and services
circular flow model- bottom right corner (red line)
goods and services
government failure
inefficiencies in resource allocation caused by problems in the operation of the public sector (government); specific examples include the principal-agent problem, the special-interest effect, the collective-action problem, rent seeking, and political corruption
why is private property important in the market system
it gives individuals the exclusive right to use their resources as they see fit
why does the use of money contribute to economic efficiency
it promote specification by overcoming the problem with bartering
circular flow model- top right corner (red line)
labor, land, capital, entrepreneurial ability
What are the 4 factors of production?
land, labor, capital, and entrepreneurial ability
macro or micro : the unemployment rate in the us was 5.1 percent in September of 2015
macro
A person should consume more of something when its ___________ __________ exceeds it's ______________ ___________
marginal benefits marginal lost
budget deficit
the amount by which expenditures exceed revenues in any year
rent seeking
the appeal to government for special benefits at taxpayers' or someone else's expense
public choice theory
the economic analysis of government decision making, politics, and elections
Shops stock and sell the goods customers want but the government levies a sales tax on each transaction to fund elementary schools, public libraries, and welfare programs
market system
macro or micro : A U.S. software firm discharged 15 workers last month and transfers workers to India
micro
macro or micro : An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges to rise
micro
macro or micro : Last week, Wells Fargo Bank lowered its interest rate on business loans by one-half of 1 percentage point.
micro
circular flow model- Top right corner (blue line)
money income ( wages, rents, interests, profits)
why is money not an economic resource.
money is used to buy resources, money itself doesn't produce anything
earmarks
narrow, specially designated spending authorizations placed in broad legislation by senators and representatives for the purpose of providing benefits to firms and organizations within their constituencies; earmarked projects are exempt from competitive bidding and normal evaluation procedures
political corruption
occurs when government officials abuse their power for personal gain. official bribed to do job or takes bribe to do something illegal.
why do government officials often make inefficient choices?
opportunity costs are difficult to assess; government officials have insufficient information
government failure
refers to economically inefficient outcomes caused by shortcomings in the public sector
circular flow model- Top left corner (red line)
resources
circular flow model- bottom left corner (blue line)
revenue
rent seeking
the actions by persons, firms, or unions to gain special benefits from government at the taxpayers' or someone else's expense
collective-action problem
the idea that getting a group to pursue a common, collective goal gets harder the large the group's size; large groups are more costly to organize and their members are more difficult to motivate because the larger the group, the smaller each member's share of the benefits if the group succeeds
What does a production possibilities curve show?
the maximum combinations of goods and services that can be produced from a fixed amount of resources in a given period of time l these curves show what the opportunity cost will be if a particular action is taken.
deregulation
the removal of most or even all of the government regulation and laws designed to supervise an industry; sometimes undertaken to combat regulatory capture
regulatory capture
the situation that occurs when a governmental regulatory agency ends up being controlled by the industry that it is supposed to be regulating
Economics
the social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity
logrolling
the trading of votes by legislators to secure favorable outcomes on decisions concerning the provision of public goods and quasi-public goods
political corruption
the unlawful misdirection of governmental resources or actions that occurs when government officials abuse their entrusted powers for personal gain
broadly defined what does competition involve
there are independently acting buyers and sellers in each market
unintended consequences
unexpected results of government policies; can be good or bad, but normally refer to unexpected negative outcomes
unfunded liability
when the government commits to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures
budget deficit
when the governments tax revenues are less than its spending
