# Macroeconomics (Intermediate): Market Structures, Market Failures & Macroeconomic Aggregates > Competitive and non-competitive market structures, externalities, public goods, GDP accounting, inflation mechanics, and unemployment dynamics - **Canonical URL:** https://flashcards.world/flashcards/sets/26cd5f20-036c-46ce-9d27-63fadeb9862f/ - **Markdown URL:** https://flashcards.world/flashcards/sets/26cd5f20-036c-46ce-9d27-63fadeb9862f.md - **Level:** intermediate - **Languages:** en → en - **Total Cards:** 32 ## Flashcards (32 Cards) | # | Front (Term / Prompt) | Back (Definition / Answer) | Example | Multiple-Choice Options | | :--- | :--- | :--- | :--- | :--- | | 1 | What is a negative externality, and why does a free competitive market overproduce the good? | A cost imposed on a third party not involved in the transaction; private marginal cost is less than social marginal cost (PMC < SMC), leading to market overproduction and deadweight loss. | | | | 2 | Define Gross Domestic Product (GDP) using the expenditure approach formula. | GDP = C + I + G + NX (Consumption + Gross Private Domestic Investment + Government Purchases + Net Exports [Exports - Imports]). | | | | 3 | What are the three main classifications of unemployment? | Frictional (transitional job search time), Structural (mismatch between worker skills/location and employer requirements), and Cyclical (resulting from macroeconomic downturns). | | | | 4 | Why is a firm in a perfectly competitive market a price taker, and what is the shape of its individual demand curve? | Because its output is negligible relative to the entire market; its individual demand curve is perfectly elastic (horizontal) at the market price, where P = MR = AR. | | | | 5 | What is the marginal propensity to consume (MPC) and marginal propensity to save (MPS)? | MPC = ΔConsumption / ΔDisposable Income; MPS = ΔSaving / ΔDisposable Income; by definition, MPC + MPS = 1. | | | | 6 | What is the Tragedy of the Commons and which category of goods does it affect? | The overconsumption and degradation of common-pool resources (rivalrous but non-excludable goods, e.g., ocean fisheries, shared grazing land) due to absent individual ownership incentives. | | | | 7 | What transactions are explicitly excluded from GDP calculations to avoid double counting or non-productive distortions? | Intermediate goods, secondhand/used goods sales, purely financial transactions (stocks/bonds transfers), transfer payments (social security), and non-market/underground economic activities. | | | | 8 | How is the official Unemployment Rate calculated in labor economics? | Unemployment Rate = (Number of Unemployed / Labor Force) * 100, where Labor Force = Employed + Unemployed actively seeking work. | | | | 9 | What is the GDP Deflator, and how is it calculated? | A price index measuring the average price level of all domestically produced final goods and services: GDP Deflator = (Nominal GDP / Real GDP) * 100. | | | | 10 | How do adverse selection and moral hazard differ in asymmetric information theory? | Adverse selection occurs pre-contract when hidden characteristics cause unobserved undesirable parties to participate; moral hazard occurs post-contract when hidden actions/lack of monitoring induce risky behavior. | | | | 11 | What is a Pigouvian tax, and how does it correct a negative production externality? | A per-unit tax set exactly equal to the marginal external damage (marginal external cost) at the socially optimal output level, internalizing the externality and shifting PMC up to SMC. | | | | 12 | Why do perfectly competitive firms earn zero economic profit in the long run? | Free entry and exit: positive economic profits attract new entrants (increasing industry supply and driving price down), while losses prompt exits (decreasing supply and driving price up) until P = min ATC. | | | | 13 | What is the Natural Rate of Unemployment (NAIRU)? | The Non-Accelerating Inflation Rate of Unemployment, representing the baseline level of frictional and structural unemployment present when cyclical unemployment is zero and inflation is stable. | | | | 14 | Define public goods and contrast them with private goods using rivalry and excludability. | Public goods are non-excludable (impossible to prevent non-payers from consuming) and non-rivalrous (one person's use does not diminish availability to others); private goods are both excludable and rivalrous. | | | | 15 | What is the Consumer Price Index (CPI), and what are its main measurement biases? | A weighted basket index tracking changes in prices paid by urban consumers for fixed goods; key biases include substitution bias, quality change bias, and new product introduction bias. | | | | 16 | Distinguish between demand-pull inflation and cost-push inflation. | Demand-pull inflation occurs when aggregate spending outpaces aggregate productive capacity ('too much money chasing too few goods'); cost-push inflation is triggered by negative supply shocks that spike input costs. | | | | 17 | What is the kinked demand curve model in oligopoly, and what price behavior does it explain? | It assumes rivals match price cuts but ignore price increases, producing a discontinuous marginal revenue curve and explaining price rigidity (stickiness) in oligopolistic markets. | | | | 18 | How does Nominal GDP differ from Real GDP? | Nominal GDP evaluates economic output using current-year prices, whereas Real GDP adjusts for price changes by valuing output at constant base-year prices, measuring actual physical volume change. | | | | 19 | State the short-run shutdown rule for a competitive firm. | The firm should shut down operations if the market price falls below Average Variable Cost (P < AVC), losing only fixed costs. | | | | 20 | State the Fisher Equation relating nominal interest rate, real interest rate, and expected inflation. | i ≈ r + π^e (Nominal Interest Rate ≈ Real Interest Rate + Expected Inflation Rate), or exactly (1 + i) = (1 + r)(1 + π^e). | | | | 21 | What is Okun's Law in macroeconomic analysis? | An empirical relationship observing that for every 1% cyclical increase in the unemployment rate above its natural rate, an economy's GDP falls roughly 2% below its potential GDP. | | | | 22 | What is the Coase Theorem, and under what conditions does private bargaining solve externalities efficiently? | If property rights are clearly assigned and transaction costs are negligible, private parties can bargain to achieve an efficient resource allocation regardless of initial rights distribution. | | | | 23 | What is the Labor Force Participation Rate formula? | Labor Force Participation Rate = (Labor Force / Civilian Non-Institutional Working-Age Population) * 100. | | | | 24 | What is a Gini coefficient, and how is it interpreted on the Lorenz curve? | A measure of income inequality equal to area A (between line of equality and Lorenz curve) divided by total area under equality line (A + B); ranges from 0 (perfect equality) to 1 (perfect inequality). | | | | 25 | What is the Free-Rider Problem in public goods provision? | Because public goods are non-excludable, individuals have an incentive to consume without contributing to costs, causing private markets to under-provide or fail to provide the good. | | | | 26 | What is a natural monopoly, and what cost condition causes it? | An industry where a single firm can supply the entire market at a lower average total cost than two or more firms, caused by substantial economies of scale spanning total market demand. | | | | 27 | How does monopolistic competition differ from perfect competition in the long run? | Firms produce differentiated products and face downward-sloping demand curves, resulting in excess capacity and markup over marginal cost (P > MC), even though free entry drives economic profits to zero (P = ATC). | | | | 28 | What are the four primary defining characteristics of a perfectly competitive market? | Large number of small buyers and sellers, homogeneous/standardized products, free entry and exit, and perfect information. | | | | 29 | What profit-maximizing output condition applies to all firms with market power, and how is the price determined? | The firm produces where MR = MC, and then charges the highest price consumers are willing to pay for that quantity off the demand curve (P > MC). | | | | 30 | Why is a pure monopoly a price maker, and why does its marginal revenue curve lie below its demand curve? | The monopolist faces the downward-sloping market demand curve alone; to sell an additional unit, it must lower the price on that unit and all prior units, so MR < P. | | | | 31 | Distinguish between first, second, and third-degree price discrimination. | 1st degree: charging each consumer their exact reservation price (extracting all consumer surplus); 2nd degree: charging different prices based on quantity purchased; 3rd degree: charging different prices to distinct consumer groups based on elasticity of demand. | | | | 32 | What is the defining structural feature of an oligopoly? | Mutual interdependence among a small number of dominant firms, where each firm's pricing and output decisions directly affect its competitors' payoffs. | | | --- Study this deck interactively with FSRS-6 spaced repetition, audio review, and multiple-choice mode at [Flashcards World](https://flashcards.world/flashcards/sets/26cd5f20-036c-46ce-9d27-63fadeb9862f/).