What creates a risk of overusing a common-pool resource?

Use is rival, but excluding users is difficult. With weak rules, users may ignore the costs their extraction imposes on others, as in an open-access fishery. Overuse is not inevitable: enforceable community rules, public regulation or suitable property rights can help sustain the resource.

How do the natural rate of unemployment and NAIRU differ?

The natural rate describes unemployment associated with longer-run labor-market structure and job matching, rather than cyclical demand weakness. NAIRU is the unemployment rate consistent with non-accelerating inflation in a specified model. They can coincide in simple models but are not universally identical. Both are estimated, can change, and are not directly observed.

How do adverse selection and moral hazard differ?

Adverse selection concerns hidden characteristics that affect who enters a contract, such as an insurer being unable to distinguish risk types. Moral hazard concerns actions that cannot be fully monitored and incentives that change when someone is protected from part of a loss, such as reduced precautions after insurance. The distinction is about information and incentives, not moral worth.

What does Okun’s law say about output and unemployment?

It is an empirical inverse relationship between economic activity and unemployment, not a fixed physical law. In a common gap illustration, output 2% below potential corresponds to unemployment about 1 percentage point above its reference rate. The coefficient depends on the country, period and specification; a percentage point is not a 1% relative change.

What does the Coase theorem suggest about bargaining over an externality?

With clearly defined, enforceable rights, costless transactions and effective bargaining, affected parties can reach an efficient outcome. Who initially holds the rights affects payments and distribution. Large bargaining costs, holdouts and incomplete information can obstruct agreement; the theorem does not say that assigning rights alone solves every externality.

Why is marginal revenue below price for a single-price monopolist?

With downward-sloping demand, selling more requires a lower price on all units sold. Extra revenue from the additional unit is partly offset by lower revenue on earlier units, so MR < P at positive output. This reasoning assumes one price for all units; perfect price discrimination works differently.

When should a perfectly competitive firm shut down in the short run?

In the standard model with unavoidable fixed costs and avoidable variable costs, shut down when P < minimum average variable cost (AVC): no positive output covers variable cost. At P = minimum AVC, operating at the minimizing output and shutting down give the same loss. A loss alone does not justify shutdown; operating can still cover some fixed cost.

How does labor-force participation differ from the unemployment rate?

Participation rate = labor force ÷ working-age population × 100; the labor force is employed plus unemployed people. It asks what share participates, rather than what share of participants lacks work. Age and population coverage vary: U.S. statistics commonly use the civilian noninstitutional population aged 16 and over, which is not a universal definition.

How do frictional, structural and cyclical unemployment differ?

Frictional unemployment arises while people search or move between jobs. Structural unemployment reflects persistent mismatches, such as skills or location differing from employers’ needs. Cyclical unemployment is associated with weak aggregate demand during a downturn. These categories explain mechanisms; they are not perfectly separable labels for every person.

What does the standard long-run model of monopolistic competition predict?

Many firms sell differentiated products with free entry and exit. Entry erodes economic profit until P = average total cost; with downward-sloping firm demand, P exceeds marginal cost. Output is below the level minimizing average total cost, called excess capacity. Zero economic profit still includes a normal return.

Why is “GDP excludes all nonmarket and underground activity” incorrect?

GDP includes nonmarket government services and imputed housing services for owner-occupiers. Unpaid household services are generally outside its production boundary, whereas hidden market production belongs within it but can be hard to measure. Cash transfers and resales of existing assets are not new output; current brokerage services can count. Intermediate inputs are not added again on top of the final product.

How should a single-price monopolist use the MR = MC rule?

For a smooth interior profit maximum, marginal revenue equals marginal cost. Treat the intersection as a candidate: compare total profit with other feasible outputs, including shutdown. Then read the price from demand at the chosen quantity. MR = MC is not sufficient by itself and need not hold at a boundary optimum.

What does a consumer price index measure, and why is measurement challenging?

A CPI tracks changes in prices paid for a representative mix of consumer goods and services for a defined population. Statistical agencies update weights and methods; the basket is not permanently fixed. Substitution, changing product quality and new goods complicate comparisons. A CPI is not every household’s personal inflation rate.

What assumptions define the standard model of perfect competition?

Many small buyers and sellers, an identical product, relevant information available to participants, and free entry and exit. Each firm takes the market price as given. This is a benchmark model; actual markets may meet these assumptions only approximately.

What two properties define a pure public good?

Non-rivalry: one person’s use does not reduce what remains for others. Non-excludability: preventing nonpayers from benefiting is infeasible or prohibitively costly. National defense is a common example. Government provision alone does not make something a public good; a hospital bed is rival.

Why can free riding cause public goods to be underprovided?

When people can benefit without paying, each has an incentive to leave contributions to others. Voluntary funding may therefore fall below the socially desirable level. Provision need not fall to zero: taxation, voluntary cooperation, donations or other arrangements can fund the good.

How do the three degrees of price discrimination differ?

First degree: charge each buyer the maximum they are willing to pay for each unit. Second degree: buyers select among quantity or quality packages. Third degree: charge identifiable customer groups different prices, such as student and standard tickets. Discrimination requires market power and limits on resale; a cost difference alone does not establish it.

How can a negative production externality cause overproduction?

Production imposes uncompensated costs on others, so marginal social cost equals marginal private cost plus marginal external cost: MSC = MPC + MEC. If private and social benefits coincide and other distortions are absent, a competitive market ignores MEC and produces more than the socially efficient quantity.

How is the GDP implicit price deflator calculated and interpreted?

Deflator = nominal GDP ÷ corresponding real GDP × 100, using compatible units and reference-year scaling. If nominal GDP is 220 and real GDP is 200, the deflator is 110. It covers domestic production, including exports, while imports are excluded directly. Inflation is the percentage change in this index, not the index level itself.

Why is a perfectly competitive firm’s demand curve horizontal?

The firm is too small to influence the market price and can sell its chosen output at that price. Thus its price, average revenue and marginal revenue are equal: P = AR = MR. The entire market’s demand curve need not be horizontal.

What does GDP = C + I + G + (X − M) measure?

Gross domestic product (GDP) measures domestic production of final goods and services during a period through expenditure. In the common U.S. convention, C is consumption, I is gross private investment including inventories, G is government consumption and investment, and X − M is exports minus imports. Imports are subtracted because C, I and G can include foreign output. Buying shares is not I.

What does the Gini coefficient measure?

It summarizes inequality in a specified distribution, such as household disposable income. With nonnegative incomes and a positive total, it ranges from 0 for equality toward 1 for extreme concentration, or 0–100 when scaled. It is the area between the equality line and Lorenz curve divided by the whole area under the equality line. Equal Ginis can conceal different distributions; it is not a poverty measure.

How is the unemployment rate calculated?

Unemployment rate = unemployed ÷ (employed + unemployed) × 100. Statistical definitions generally require a person to be without employment, available and actively seeking work, with specified exceptions. Someone discouraged from searching is usually outside the labor force, not counted as employed. Use the relevant agency’s definitions.

What distinguishes oligopoly from perfect competition?

A few firms account for much of the market, and each firm’s pricing or output decisions affect its rivals. Decisions are strategically interdependent. Firms may compete intensely, coordinate or collude; oligopoly alone does not imply that they form a cartel.

Why does the standard long-run competitive equilibrium have zero economic profit?

With free entry and exit and identical cost conditions, profits attract entry and losses cause exit until P = minimum average total cost. Economic cost includes the normal return on resources, so zero economic profit can coexist with positive accounting profit. This is a model result, not a claim about every real firm.

What does the kinked-demand model explain, and what does it leave unexplained?

It assumes rivals match a price cut but do not match a price increase. Demand is more elastic above the current price and less elastic below it, creating a gap in marginal revenue. Some marginal-cost changes within that gap leave the chosen price unchanged. The model explains possible price rigidity, not how the original price was set.

How do nominal and real GDP differ?

Nominal GDP values output at current prices. Real GDP measures changes in the volume of production after removing price changes. A fixed base-year price calculation illustrates the idea, but many statistical agencies use chain-linked measures with changing weights. Nominal growth alone cannot show how much production increased.

What makes a monopoly a natural monopoly?

At the relevant level of market demand, one firm can supply the total output at lower cost than splitting it among several firms: costs are subadditive. Economies of scale across the relevant output range are a common sufficient reason in the single-product case, but continuously falling average cost is not necessary.

How do nominal interest, real interest and inflation relate?

Approximately, real interest r ≈ nominal interest i − inflation π. For a realized one-period return, the exact relation is r = (1 + i)/(1 + π) − 1, with rates as decimals. A 5% nominal return and 2% inflation give about 2.94% real return. Forward-looking comparisons use expected inflation and remain uncertain.

How are the marginal propensities to consume and save related?

For a change (Δ) in disposable income Yd, with consumption C and saving S, MPC = ΔC/ΔYd and MPS = ΔS/ΔYd. If Yd = C + S for the same period and ΔYd ≠ 0, then MPC + MPS = 1. Spending 80 of an extra 100 and saving 20 gives MPC = 0.8 and MPS = 0.2. These are changes, not the average shares C/Yd and S/Yd.

How do demand-pull and cost-push inflation differ?

Demand-pull pressure comes from aggregate spending growing relative to sustainable productive capacity. Cost-push pressure comes from adverse supply developments, such as higher energy costs or disrupted production. A one-off price-level increase need not produce continuing inflation; expectations and subsequent wage, price and policy responses affect persistence.

How is the ideal Pigouvian tax set for a negative production externality?

In a competitive model without other distortions, set a per-unit tax equal to marginal external damage at the socially efficient output. The producer then faces the right incentive at that output. When marginal damage varies with output, a constant tax does not make private and social marginal-cost curves coincide everywhere; estimating damage is also difficult.

Market Structures, Market Failures & Macroeconomic Aggregates

Microeconomic market structures (perfect competition, monopoly, monopolistic competition, oligopoly), externalities and public goods, and core macroeconomic indicators including GDP accounting, inflation (CPI, GDP deflator), unemployment, and Lorenz/Gini inequality measures.

Level: intermediate
Languages: en → en
Cards: 32
Markdown: Market Structures, Market Failures & Macroeconomic Aggregates (.md)

Flashcards (32)

#	Front (Term / Question)	Back (Definition / Answer)
1	What creates a risk of overusing a common-pool resource?	Use is rival, but excluding users is difficult. With weak rules, users may ignore the costs their extraction imposes on others, as in an open-access fishery. Overuse is not inevitable: enforceable community rules, public regulation or suitable property rights can help sustain the resource.
2	How do the natural rate of unemployment and NAIRU differ?	The natural rate describes unemployment associated with longer-run labor-market structure and job matching, rather than cyclical demand weakness. NAIRU is the unemployment rate consistent with non-accelerating inflation in a specified model. They can coincide in simple models but are not universally identical. Both are estimated, can change, and are not directly observed.
3	How do adverse selection and moral hazard differ?	Adverse selection concerns hidden characteristics that affect who enters a contract, such as an insurer being unable to distinguish risk types. Moral hazard concerns actions that cannot be fully monitored and incentives that change when someone is protected from part of a loss, such as reduced precautions after insurance. The distinction is about information and incentives, not moral worth.
4	What does Okun’s law say about output and unemployment?	It is an empirical inverse relationship between economic activity and unemployment, not a fixed physical law. In a common gap illustration, output 2% below potential corresponds to unemployment about 1 percentage point above its reference rate. The coefficient depends on the country, period and specification; a percentage point is not a 1% relative change.
5	What does the Coase theorem suggest about bargaining over an externality?	With clearly defined, enforceable rights, costless transactions and effective bargaining, affected parties can reach an efficient outcome. Who initially holds the rights affects payments and distribution. Large bargaining costs, holdouts and incomplete information can obstruct agreement; the theorem does not say that assigning rights alone solves every externality.
6	Why is marginal revenue below price for a single-price monopolist?	With downward-sloping demand, selling more requires a lower price on all units sold. Extra revenue from the additional unit is partly offset by lower revenue on earlier units, so MR < P at positive output. This reasoning assumes one price for all units; perfect price discrimination works differently.
7	When should a perfectly competitive firm shut down in the short run?	In the standard model with unavoidable fixed costs and avoidable variable costs, shut down when P < minimum average variable cost (AVC): no positive output covers variable cost. At P = minimum AVC, operating at the minimizing output and shutting down give the same loss. A loss alone does not justify shutdown; operating can still cover some fixed cost.
8	How does labor-force participation differ from the unemployment rate?	Participation rate = labor force ÷ working-age population × 100; the labor force is employed plus unemployed people. It asks what share participates, rather than what share of participants lacks work. Age and population coverage vary: U.S. statistics commonly use the civilian noninstitutional population aged 16 and over, which is not a universal definition.
9	How do frictional, structural and cyclical unemployment differ?	Frictional unemployment arises while people search or move between jobs. Structural unemployment reflects persistent mismatches, such as skills or location differing from employers’ needs. Cyclical unemployment is associated with weak aggregate demand during a downturn. These categories explain mechanisms; they are not perfectly separable labels for every person.
10	What does the standard long-run model of monopolistic competition predict?	Many firms sell differentiated products with free entry and exit. Entry erodes economic profit until P = average total cost; with downward-sloping firm demand, P exceeds marginal cost. Output is below the level minimizing average total cost, called excess capacity. Zero economic profit still includes a normal return.
11	Why is “GDP excludes all nonmarket and underground activity” incorrect?	GDP includes nonmarket government services and imputed housing services for owner-occupiers. Unpaid household services are generally outside its production boundary, whereas hidden market production belongs within it but can be hard to measure. Cash transfers and resales of existing assets are not new output; current brokerage services can count. Intermediate inputs are not added again on top of the final product.
12	How should a single-price monopolist use the MR = MC rule?	For a smooth interior profit maximum, marginal revenue equals marginal cost. Treat the intersection as a candidate: compare total profit with other feasible outputs, including shutdown. Then read the price from demand at the chosen quantity. MR = MC is not sufficient by itself and need not hold at a boundary optimum.
13	What does a consumer price index measure, and why is measurement challenging?	A CPI tracks changes in prices paid for a representative mix of consumer goods and services for a defined population. Statistical agencies update weights and methods; the basket is not permanently fixed. Substitution, changing product quality and new goods complicate comparisons. A CPI is not every household’s personal inflation rate.
14	What assumptions define the standard model of perfect competition?	Many small buyers and sellers, an identical product, relevant information available to participants, and free entry and exit. Each firm takes the market price as given. This is a benchmark model; actual markets may meet these assumptions only approximately.
15	What two properties define a pure public good?	Non-rivalry: one person’s use does not reduce what remains for others. Non-excludability: preventing nonpayers from benefiting is infeasible or prohibitively costly. National defense is a common example. Government provision alone does not make something a public good; a hospital bed is rival.
16	Why can free riding cause public goods to be underprovided?	When people can benefit without paying, each has an incentive to leave contributions to others. Voluntary funding may therefore fall below the socially desirable level. Provision need not fall to zero: taxation, voluntary cooperation, donations or other arrangements can fund the good.
17	How do the three degrees of price discrimination differ?	First degree: charge each buyer the maximum they are willing to pay for each unit. Second degree: buyers select among quantity or quality packages. Third degree: charge identifiable customer groups different prices, such as student and standard tickets. Discrimination requires market power and limits on resale; a cost difference alone does not establish it.
18	How can a negative production externality cause overproduction?	Production imposes uncompensated costs on others, so marginal social cost equals marginal private cost plus marginal external cost: MSC = MPC + MEC. If private and social benefits coincide and other distortions are absent, a competitive market ignores MEC and produces more than the socially efficient quantity.
19	How is the GDP implicit price deflator calculated and interpreted?	Deflator = nominal GDP ÷ corresponding real GDP × 100, using compatible units and reference-year scaling. If nominal GDP is 220 and real GDP is 200, the deflator is 110. It covers domestic production, including exports, while imports are excluded directly. Inflation is the percentage change in this index, not the index level itself.
20	Why is a perfectly competitive firm’s demand curve horizontal?	The firm is too small to influence the market price and can sell its chosen output at that price. Thus its price, average revenue and marginal revenue are equal: P = AR = MR. The entire market’s demand curve need not be horizontal.
21	What does GDP = C + I + G + (X − M) measure?	Gross domestic product (GDP) measures domestic production of final goods and services during a period through expenditure. In the common U.S. convention, C is consumption, I is gross private investment including inventories, G is government consumption and investment, and X − M is exports minus imports. Imports are subtracted because C, I and G can include foreign output. Buying shares is not I.
22	What does the Gini coefficient measure?	It summarizes inequality in a specified distribution, such as household disposable income. With nonnegative incomes and a positive total, it ranges from 0 for equality toward 1 for extreme concentration, or 0–100 when scaled. It is the area between the equality line and Lorenz curve divided by the whole area under the equality line. Equal Ginis can conceal different distributions; it is not a poverty measure.
23	How is the unemployment rate calculated?	Unemployment rate = unemployed ÷ (employed + unemployed) × 100. Statistical definitions generally require a person to be without employment, available and actively seeking work, with specified exceptions. Someone discouraged from searching is usually outside the labor force, not counted as employed. Use the relevant agency’s definitions.
24	What distinguishes oligopoly from perfect competition?	A few firms account for much of the market, and each firm’s pricing or output decisions affect its rivals. Decisions are strategically interdependent. Firms may compete intensely, coordinate or collude; oligopoly alone does not imply that they form a cartel.
25	Why does the standard long-run competitive equilibrium have zero economic profit?	With free entry and exit and identical cost conditions, profits attract entry and losses cause exit until P = minimum average total cost. Economic cost includes the normal return on resources, so zero economic profit can coexist with positive accounting profit. This is a model result, not a claim about every real firm.
26	What does the kinked-demand model explain, and what does it leave unexplained?	It assumes rivals match a price cut but do not match a price increase. Demand is more elastic above the current price and less elastic below it, creating a gap in marginal revenue. Some marginal-cost changes within that gap leave the chosen price unchanged. The model explains possible price rigidity, not how the original price was set.
27	How do nominal and real GDP differ?	Nominal GDP values output at current prices. Real GDP measures changes in the volume of production after removing price changes. A fixed base-year price calculation illustrates the idea, but many statistical agencies use chain-linked measures with changing weights. Nominal growth alone cannot show how much production increased.
28	What makes a monopoly a natural monopoly?	At the relevant level of market demand, one firm can supply the total output at lower cost than splitting it among several firms: costs are subadditive. Economies of scale across the relevant output range are a common sufficient reason in the single-product case, but continuously falling average cost is not necessary.
29	How do nominal interest, real interest and inflation relate?	Approximately, real interest r ≈ nominal interest i − inflation π. For a realized one-period return, the exact relation is r = (1 + i)/(1 + π) − 1, with rates as decimals. A 5% nominal return and 2% inflation give about 2.94% real return. Forward-looking comparisons use expected inflation and remain uncertain.
30	How are the marginal propensities to consume and save related?	For a change (Δ) in disposable income Yd, with consumption C and saving S, MPC = ΔC/ΔYd and MPS = ΔS/ΔYd. If Yd = C + S for the same period and ΔYd ≠ 0, then MPC + MPS = 1. Spending 80 of an extra 100 and saving 20 gives MPC = 0.8 and MPS = 0.2. These are changes, not the average shares C/Yd and S/Yd.
31	How do demand-pull and cost-push inflation differ?	Demand-pull pressure comes from aggregate spending growing relative to sustainable productive capacity. Cost-push pressure comes from adverse supply developments, such as higher energy costs or disrupted production. A one-off price-level increase need not produce continuing inflation; expectations and subsequent wage, price and policy responses affect persistence.
32	How is the ideal Pigouvian tax set for a negative production externality?	In a competitive model without other distortions, set a per-unit tax equal to marginal external damage at the socially efficient output. The producer then faces the right incentive at that output. When marginal damage varies with output, a constant tax does not make private and social marginal-cost curves coincide everywhere; estimating damage is also difficult.