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Study Guide for McConnell and Brue Chapters 3-5 Quiz
Review
Lecture and Discussion Notes
diminishing
marginal utility The decrease
in added satisfaction that results as one consumes additional units of a good
or service, i.e., the second “Big Mac” yields less extra satisfaction (or
utility) than the first.
income
effect A lower price
increases the purchasing power of money income enabling the consumer to buy
more at lower price (or less at a higher price).
substitution
effect A lower price gives
an incentive to substitute the lower-priced good for now relatively
higher-priced goods.
demand
curve A curve
illustrating the inverse relationship between price and quantity.
law of
supply The principle that,
other things equal, an increase in the price of a product will increase the
quantity of it supplied, and conversely for a price decrease.
surplus The amount by which the quantity supplied
of a product exceeds the quantity demanded at a specific
(above-equilibrium) price.
shortage The amount by which the quantity demanded
of a product exceeds the quantity supplied at a particular
(below-equilibrium) price.
equilibrium
price The price in
a competitive market at which the quantity demanded and the quantity
supplied are equal, there is neither a shortage nor a surplus, and there is
no tendency for price to rise or fall.
substitute
goods Products or
services that can be used in place of each other. When the price of one falls,
the demand for the other product falls; conversely, when the price of one
product rises, the demand for the other product rises.
complementary
goods Products and
services that are used together. When the price of one falls, the demand for
the other increases (and conversely).
changes in
quantity supplied and demand
(See Chapter 3
Lecture Notes Section V)
Be able to
graph supply and demand.
division
of labor The separation of
the work required to produce a product into a number of different tasks that
are performed by different workers; specialization of workers.
economic
cost A payment that must
be made to obtain and retain the services of a resource; the income a
firm must provide to a resource supplier to attract the resource away from an
alternative use; equal to the quantity of other products that cannot be
produced when resources are instead used to make a particular product.
economic
profit The total
revenue of a firm less its economic costs (which include both
payments to resource suppliers and the opportunity costs of firm-owned
resources); also called “pure profit” and “above-normal profit.”
normal
profit The payment made by
a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to
perform entrepreneurial functions for a firm.
“invisible
hand” The tendency of
firms and resource suppliers that seek to further their own self-interests in
competitive markets to also promote the interest of society.
household An economic unit (of one or more persons)
that provides the economy with resources and uses the income received to
purchase goods and services that satisfy economic wants.
business
firm An organization
that employs resources to produce a good or service for profit and owns and
operates one or more plants.
sole
proprietorship An unincorporated firm
owned and operated by one person.
partnership An unincorporated firm owned and operated by
two or more persons.
corporation A legal entity (“person”) chartered by a
state or the Federal government that is distinct and separate from the
individuals who own it.
industry A group of (one or more) firms that produce identical or similar products.
circular
flow model The flow of
resources from households to firms and of products from firms to
households. These flows are accompanied by reverse flows of money from firms to
households and from households to firms.
reallocation
of resources (See Chapter 5
Lecture Notes Section V. D.)
spillover
effect A benefit or cost
from production or consumption, accruing without compensation to nonbuyers and
nonsellers of the product.
double
taxation The taxation of
both corporate net income (profits) and the dividends paid from this net
income when they become the personal income of households.
payroll
tax A tax levied on
employers of labor equal to a percentage of all or part of the wages and
salaries paid by them and on employees equal to a percentage of all or part of
the wages and salaries received by them.
sales tax A tax levied on the cost (at retail) of a
broad group of products.
corporate
income tax A tax levied on the
net income (profit) of corporations.
property
tax A tax on the value
of property (capital, land, stocks and bonds, and other assets)
owned by firms and households.
excise tax A tax levied on the production of a specific
product or on the quantity of the product purchased.
marginal
tax rate The tax rate paid
on each additional dollar of income.
transfer
payments A payment of money
(or goods and services) by a government to a household or firm
for which the payer receives no good or service directly in return.
Identifications
(Be able to
list and discuss the advantages and disadvantages of each):
Advantages:
easy to set up; proprietor is his/her own boss; because profit is proprietor’s
income, there is an incentive to operate the business efficiently.
Disadvantages: financial
resources are limited and insufficient; the proprietor is responsible for all
of management functions; the proprietor is subject to unlimited liability.
Advantages: easy to
organize; greater specialization; better access to financial resources than
proprietorships.
Disadvantages:
some of the same shortcomings of the proprietorship; possible difficulties in
sharing management responsibilities; still limited financial resources;
problems if one of the partners leaves; still unlimited liabilities.
Advantages:
improved ability to raise financial capital (money); defining and comparing
stocks and bonds; limited liabilities; corporations have a permanence that is
conducive to long-run planning and growth.
Disadvantages:
red tape and expense in obtaining a corporate charter; unscrupulous business
owners sometimes avoid responsibility for questionable business activities.
What is a
market? Define it and give examples.
Any institution or mechanism that brings together buyers (demanders) and
sellers (suppliers) of a particular good or service.