Exam3 Definitions

Nick Johnson
Exam 3 Definitions
Ch. 13
Derived Demand – Demand that is the result of some other demand. For example, factor demand is
derived from the demand for the products that the factors go to produce
Marginal Revenue Product (MRP) – The additional revenue generated by employing an additional factor
Value Marginal Product (VMP) – The price of a good multiplied by the marginal physical product of the
factor: VMP = P x MPP
Marginal Factor Cost (MFC) – The additional cost incurred by employing an additional factor unit
Factor Price Taker – a firm can buy all of a factor it wants at the equilibrium price. Such a firm faces a
horizontal (flat, perfectly elastic) supply curve of factors
Least-Cost Rule – Rule that specifies the combination of factors that minimizes costs and so requires that
the following condition be met: MPP1IP1 = MPP2IP2…
Elasticity of Demand for Labor – The percentage change in the quantity demanded of labor divided by
the percentage change in the wage rate
Marginal Productivity Theory – Firms in competitive or perfect product and factor markets pay factors
their marginal revenue products
Screening – The process employers use to increase the probability of choosing good employees on the
basis of certain criteria
Ch. 14
Closed Shop – An organization in which an employee must belong to the union before he or she can be
Union Shop – An organization in which a worker is not required to be a member of the union in order to
be hired but must become a member within a certain time after being employed
Collective Bargaining – The process whereby wage rates and other issues are determined by a union
bargaining with management on behalf of all union members
Strike – The union employees’ refusal to work at a certain wage or under certain conditions
Monopoly – a theory of market structure based on three assumptions: there is one seller, it sells a
product that has no close substitutes, and the barriers to entry are extremely high
Ch. 15
In-Kind Transfer Payments – Transfer payments, such as food stamps, medical assistance, and
subsidizing housing, that are made in a specific good or service rather than in cash
Transfer Payments – Payments to persons that are not made in return for goods and services currently
Lorenz Curve – a graph that expresses the relationship between the cumulative percentage of
households and the cumulative percentage of income over the income distribution
Gini Coefficient – A measure of the degree of inequality in the income distribution
Human Capital – Education, development of skills, and anything else that is particular to the individual
and that increases personal productivity
Wage Discrimination – The situation in which individuals of equal ability and productivity (as measured
by their contribution to output) are paid different wage rates
Poverty Income Threshold (Poverty Line) – The income level below which people are considered to be
living in property
Ch. 16
Loanable Funds – Funds that someone borrows and another person lends, for which the borrower pays
an interest rate to the lender
Positive Rate of Time Preference – A preference for earlier over later availability of goods
Roundabout Method of Production – The production of capital goods that enhance productive
capabilities to ultimately bring about increased consumption
Nominal Interest Rate – The interest rate actually charged (or paid) in the market; the market interest
rate: nominal interest rate = real interest rate + expected inflation rate
Real Interest Rate – The nominal interest rate minus the expected inflation rate. When the expected
inflation rate is zero, the real interest rate equals the nominal interest rate
Present Value – The current worth of some future dollar amount of income or receipts
Economic Rent – Payment in excess of opportunity costs
Pure Economic Rent – A category of economic rent such that the payment is to a factor that is in fixed
supply, implying that the factor has zero opportunity costs
CH. 17
Market Failure – A situation in which the market does not provide the ideal or optimal amount of a good
Externality – A side effect of an action that affects the well-being of third parties
Negative Externality – The condition in which a person’s or group’s actions impose a cost (an adverse
side effect) on others
Positive Externality – The condition in which a person’s or group’s actions create a benefit (a beneficial
side effect) for others
Marginal Social Costs (MSC) – the sum of marginal private costs (MPC) and marginal external costs
Marginal Social Benefits (MSB) – the sum of marginal private benefits (MPB) and marginal external
benefits (MEB): MSB = MPB + MEB
Socially Optimal Amount (Output) – An amount that takes into account and adjusts for all benefits
(external and private) and all costs (external and private); the amount at which MSB = MSC. Sometimes
referred to as the efficient amount
Internalizing Externalities – an externality is internalized if the persons or group that generated the
externality incorporate into their own private or internal cost-benefit calculations the external benefits
(in the case of a positive externality) or the external costs (in the case of a negative externality)
Coase Theorem – In the case of trivial or zero transaction costs, the property rights assignment does not
matter to the resource allocative outcome
Rivalrous in Consumption – said of a good whose consumption by one person reduces its consumption
by others
Public Good – a good whose consumption by one person does not reduce its consumption by another
person – that is, it is nonrivalrous in consumption
Nonrivalrous in Consumption – said of a good whose consumption by one person does not reduce its
consumption by others
Excludable – a characteristic of a good whereby it is possible or not prohibitively costly to exclude
someone from receiving the benefits of the good after it has been produced
Nonexcludable – a characteristic of a good whereby it is impossible or prohibitively costly to exclude
someone from receiving the benefits of the good after it has been produced
Free Rider – anyone who receives the benefits of a good without paying for it
Asymmetric Information – a situation in which an economic agent on one side of a transaction has
information that an economic agent on the other side of the transaction does not have
Adverse Selection – a phenomenon in which the parties on one side of the market have information not
known to others and self-select in a way that adversely affects the parties on the other side of the
Moral Hazard – a condition that exists when one party to a transaction changes his or her behavior in a
way that is hidden from, and costly to, the other party
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