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Economics Final Exam Review Use of fewer resources than an economy is capable of using. Underutilization Something essential for survival. Need Effort people devote to tasks for which they are paid. Labor The extra cost of adding one unit. Marginal Cost The most desirable alternative given up as the result of a decision. Opportunity Cost Principle that limited amounts of goods and services are available to meet unlimited wants. Scarcity The extra benefit of adding one unit. Marginal Benefit All natural resources used to make goods and services. Land When government sells and gives control of a business to individual investors. Privatization Struggle among producers for the dollars of consumers. Competition Power of consumers to decide what gets produced. Consumer Sovereignty Doctrine that government generally should not intervene in the marketplace. Laissez-Faire Concentration of productive efforts on a limited number of activities. Specialization Hope of reward or fear of penalty that encourages a person to behave in a certain way. Incentive Amount of money a business receives in excess of its expenses. Profit Organization that uses resources to produce a product or service, which it then sells. Firm Principle that people have the right to control their possessions and use them as they wish. Private Property Rights Government aid to the poor. Welfare Goods and services provided for free or at greatly reduced prices. In-Kind Benefits Principle that people may decide what agreements they want to enter into. Free Contract Commitment to the value of work. Work Ethic The principle that everyone has the same legal rights. Legal Equality Direct payments of money by the government to the poor, disabled, or retired people. Cash Transfers Right of a government to take private property for public use. Eminent Domain Two goods that are bought and used together. Complements Table listing the quantity of a good that all consumers will buy at various prices. Market Demand Schedule Measure of how consumers respond to price changes. Elasticity of Demand Goods that are used in place of one another. Substitutes Entire amount of money a company receives by selling goods or services. Total Revenue Change in consumption that results when a price increase causes real income to decline. Income Effect Consuming less of a good and more of another as a reaction to a price increase. Substitution Effect Not very sensitive to price changes. Inelastic Graph of the quantity supplied of a good at various prices. Supply Curve Amount of goods available. Supply Government intervention in a market that affects the production of a good. Regulation Chart that lists how much of a good a supplier will offer at various prices. Supply Schedule Sum of fixed costs plus variable costs. Total Cost Cost that rises or falls depending on the quantity produced. Variable Cost Tax on the production or sale of a good. Excise Tax Government payment that supports a business or market. Subsidy The amount of goods a firm has on hand. Inventory A product that is popular for a short period of time. Fad A sudden lack of availability of a good. Supply Shock The point at which the demand for a product or service equals the supply. Equilibrium Government allocation of goods and services. Rationing When quantity demanded is greater than quantity supplied. Shortage When the demand curve moves left or right. Change in Demand A price ceiling placed on the amount people pay for housing. Rent Control Illegal agreement among firms to divide the market, set prices, or limit production. Collusion Laws that encourage competition in the marketplace. Antitrust Laws Grouping consumers based on how much they will pay for a good. Price Discrimination Factor that makes it difficult for a new firm to enter a market. Barrier to Entry Market structure in which many companies sell products that are similar but not identical. Monopolistic Competition Selling a product below cost for a short period of time to drive competitors out of the market. Predatory Pricing Product that is considered the same no matter who produces or sells it. Commodity Expenses new businesses must pay before they can begin to produce and sell goods. Start-up Costs Business owned and managed by an individual. Sole Proprietorship Legal obligation to pay debts. Liability A certificate of ownership in a corporation. Stock Corporate profits paid out to stockholders. Dividend What is an example of a shortage? A type of doll is not available because a limited number were made. The government of a country must make a decision between increasing military spending and subsidizing wheat farmers. This is an example of: A guns or butter issue You bought 2 new CDs with the last $30 in your checking account, and your next payday is Monday. What is the opportunity cost of these CDs? The night out with your friends that you miss because you can’t afford it now. Which of the following lists of factors of production would an economist categorize as land? Iron ore, natural gas, fertile soil, water A company that makes baseball caps is underutilizing its resources. What does this mean? The company is producing fewer caps than it could be. What is one of the most important advantages of a free market? It encourages growth What is the product market? The market in which households purchase the goods and services that firms produce. In what kind of economy does the government make all the decisions? Centrally Planned Which of the following best describes the economy of the U.S.? Mixed, but more like a free market Which of the following might be a positive aspect of centrally planned economies? Low unemployment due to guaranteed jobs. Which statement best describes the role of government in a free enterprise system? It regulates businesses when the public interest is involved. Something is generally considered to be a public good if: The total benefits to society are greater than the total financial costs. Why has the federal government passed laws requiring businesses to disclose product information to the public? To make buyers more knowledgeable and safer. You will still be able to get a public broadcasting channel even though you did not contribute to its fundraising campaign. This is an example of: A free-rider problem A market failure occurs when a free market is unable to: Distribute resources efficiently If you create a demand schedule for an individual and for a market for the same product, what will remain the same in both schedules? Prices of the good or service Your demand for a good is inelastic if you consider the good to be: Essential The substitution effect and the income effect describe: Factors that influence consumer buying choices. The price of cranberry juice suddenly increases. As a result, Glenda begins drinking more grape juice, which is less expensive, but tastes just as good to her. In this case, Glenda’s elastic demand is due to: Availability of substitutes Due to an increase in her rent, Isa needs to cut back her spending on other items. Which of the following types of goods will Isa consume less of? Normal Goods The price of home computers rises. According to the law of supply, manufacturers will respond to this price increase by: Increasing computer production Fixed costs would include: Rent If the supply of a good is inelastic, producers will: Not change quantity supplied much if prices double. A steel mill has fixed costs of $100 per hour and variable costs of $50 per hour. What will happen to these costs if the mill closes? The variable costs will drop to zero, but the fixed costs will stay the same. Farmer Brown has ten dairy cows. Her feed costs go up, but milk production stays the same. What effect will this have on her supply? None, although she will raise prices to make up the lost revenue. On which kinds of goods do governments generally place price ceilings? Those that are essential but too expensive for some consumers. How does the free market benefit from the profit incentive? The profit incentive promotes efficient resource allocation. Which traffic signal best represents the message that providers of cable services receive from declining customer subscriptions? Red light In response to rising car traffic, demand for bicycles has increased. The new equilibrium point will show: More bicycles sold, but at a higher price. Which of the following is most likely to lead directly to a black market? Rationing What kind of market runs most efficiently when one large firm supplies all of the output? A natural monopoly In a perfectly competitive market, output reaches a point where it: Is just enough to cover opportunity costs What is one example of a monopoly that the U.S. government generally permits? Professional sports leagues Which of the following is a product that is considered a commodity? Low-grade gasoline One form of nonprice competition that firms engage in is: Advertising If a general partnership fails, who is responsible for its debts? All of the partners The federal government watches mergers to ensure they do not threaten: Competition Ellen started a catering business, but soon decided that it was too stressful for her. She was able to close her business rather easily because it was a: Sole proprietorship RunnerPro Company designs their shoes in the United States but assembles them in Singapore. RunnerPro is a: Multinational corporation Which of following is a disadvantage of a sole proprietorship? Lack of permanence