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Microeconomics Final Exam Study Guide

by: Isabelle Hue

Microeconomics Final Exam Study Guide ECON 1001

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Isabelle Hue
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These notes cover the material that will be on the final exam
Sourushe Zandvakili
Study Guide
pure, monopoly, oligopoly, monopolistic, competition, health, care, Immigration, poverty, discrimination, wage, determination, micro, Econ, final, finalexamstudyguide, thorough, notes
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Date Created: 04/16/16
MICROECONOMICS FINAL EXAM STUDY GUIDE (you should also review class slides, chapter summaries, and key graphs) CHAPTER 12 PURE MONOPOLY PURE MONOPOLY pure monopoly-a market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm  has considerable control over product price and in which nonprice competition may or may not be found —exists when a single firm is the sole producer of a product for which there are no close substitutes. • imperfect competition main characteristics of pure monopoly  • single seller-single firm is sole producer/sole supplies of specific good/service—firm and industry are synonomous • no close substitutes-product is unique, no substitutes  • price maker-(unlike pure competition)-pure monopoly controls the total quantity supplied-thus has considerable control over price ◦ confronts the usual downsloping product demand curve  ◦ can change product price by changing the quantity produced ◦ will use its power whenever its advantageous • blocked entry-no immediate competitors b/c certain barriers keep potential competitors from entering the industry ◦ barriers may be ▪ economic ▪ technological ▪ legal ▪ or some other type  • nonprice competition-product produced may either be standardized (natural gas and electricity) or differentiated (windows are frisbees) ◦ standardized product companies engage in mainly public relations advertising ◦ differentiated product companies often advertise product attributes Examples of Monopoly • pure monopoly is relatively rare • many examples of less pure forms/near monopolies  ◦ government regulated utilities- ▪ gas and electric, water companies, cable tv companies, local telephone companies ◦ professional sports teams ◦ small town barber, train station, airline=geographic monopoly barriers to entry-anything that artificially prevents the entry of firms into an industry—factors that prohibit others from entering an industry • factors that prohibit firms from entering ash industry=barriers to entry • somewhat weaker barriers in oligopoly (dominated by a few firmms) • weaker still allows entry of many firms and gives rise to monopolistic competition • weaker still = all the firms come to play and pure competition is born 4 MOST COMMON BARRIERS TO ENTRY 1. Economics of Scale-when long run ATC is declining, only a single producer or monopolist, can produce any particular amount of output at minimum total cost—it cuts out other smaller competitors because huge firms produce on a large scale and can thus afford the expensive equipment that enables them to produce at a lower cost per unit of production ◦ you can’t start out big, this explains why entries into industries such as computer operating software, commercial aircraft and household laundry equipment are so rare ◦ a monopoly firm is referred to as a natural monopoly if the market demand curve intersects the long run ATC curve at any point where average total costs are declining  ◦ natural monopolist may obtain substantial economic profit by setting a price above average total cost  ◦ they can charge so much because they are a monopoly— governments regulate monopolies for this reason 2. Legal Barriers to Entry: Patents & Licenses  ◦ government also creates barriers to entry by awarding patents and licenses  ◦ PATENTS-exclusive right of an inventor to use or allow another to use her invention ▪ used to protect inventors from those who would like to share in profits by stealing ideas without having done the work  ▪ they provide the inventor with a monopoly position over the invention for the life of the patent (thus strengthening market position)  ▪ research and development leads to most patentable inventions/products  ▪ funds from patented products allow for development of new patentable products—>becomes a cycle, like pharmaceutical companies ◦ LICENSES-liquor, radio and television, there are only so many licenses  ▪ only so many license exist so new firms cannot enter and drive prices down 3. Ownership or Control of Essential Resources ◦ monopolist can use private property as an obstacle to potential rivals  ◦ like owning land that has valuable and rare resources  ◦ nickel company in canada at one time owned land containing 90% of the worlds known nickel reserves  4. Pricing & Other Strategic Barriers to Entry ◦ monopolists may create barriers to entry-say a new firm enters an industry, the monopolist can afford to slash its prices to cut out the competition that cannot afford to do this because they have yet to achieve economics of scale ◦ sometimes illegal actions are taken MONOPOLY DEMAN —explain how demand is seen by a pure monopoly 3 assumptions  1. patents, economics of scale, or resource ownership secures the firms monopoly 2. no unit of government regulates the firm 3. the firm is a single-price monopolist: it charges the same price for all units of output  ******the major difference b/t a pure monopolist and a purely competitive seller lies on the demand side of the market purely competitive seller— • perfectly elastic demand at price determined by market supply and demand • price taker (can sell as much or little as it wants at markets going price) • each additional unit sold will add the price of the unit to the firms total revenue  (marginal revenue is constant=product price) monopolist—  • firms with downward sloping product demand curves are price makers • demand curve is quite different from purely competitive seller • b/c the monopolist is the industry its demand curve is the market demand curve • and b/c market demand curve is not perfectly elastic, the monopolists demand curve is down-sloping  • quantity demanded increases as price decreases  • yields neither productive nor allocative efficiency (monopolist does not produce at the minimum point of ATC) • pure monopolist is more likely to have economic profit in long run than pure competition  3 IMPLICATIONS OF DOWN-SLOPING MONOPLY DEMAND CURVE 1. Marginal Revenue is LESS Than Price- ◦ with a fixed down-sloping demand curve, the pure monopolist can increase sales only by charging a lower price ◦ consequently marginal revenue (the change in total revenue associated with a one-init change in output) is less than price ◦ why? the lower price of the extra until of output also applies to all prior units of output (could have sold these units at a higher price if it had not produced and sold the extra output) ◦ see pg 259 charts  ◦ demand curve is down-sloping and MARGINAL REV CURVE LIES BELOW ITS DEMAND CURVE 2. The Monopolist is a PRICE MAKRER ◦ all imperfect competitors (everything except pure competition) have downward sloping demand curves ◦ any change in quantity produced causes a movement along their respective demand curves and a change int he price they can charge for their respective products  ▪  in summary: firms with down-sloping demand curves=price makers  3. The Monopolist Sets Prices in the Elastic Region of Demand  ◦ recall_total-revenue-test reveals that when demand is elastic, a decline in price will increase total revenue ◦ similarly when demand is inelastic, a decline in price will reduce total revenue ◦ seed pg 259 ◦ the implication: a monopolist will never choose a price- quantity combo where price reductions cause total revenue to decrease (marginal revenue to be negative) ◦ monopolist will operaate in the elastic region of demand since in the inelastic region it can increase total revenue by reducing output OUTPUT & PRICE DETERMINATION **explain how a pure monopoly sets its profit-maximizing output and price (what price-quanity combo will maximize profits) Cost Data MR=MC Rule-monopolists seeking profit max will apply this rule, if producing is preferable to shutting down it will produce up till the point where marginal revenue= marginal cost, same rationale used by profit seeking competitive firms • another way to determine profit max output is by comparing total revenue and total cost at each possible level of production and choosing the output with the greatest positive difference  • you need to learn the math here No Monopoly Supply Curve  • recall_MR=P in pure competition, and the supply curve of purely competitive firms is determined by applying MR(=P)=MC profit maximizing rule (refers to pure comp.) • so it produces at P=MC, and thus each market price is associated with a specific output, and all such price-output pairs define the supply curve—which turns out to be the portion of the firms MC curve that lies above the average-variable-cost AVC curve(refers to pure comp) • pure monopolist HAS NO SUPPLY CURVE( there is no unique relationship b/t price and quantity supplied for the monopolist ◦ like a pure comp firm the pure monopolist equates MR=MC to determine output, but for the monopolist marginal revenue is less than price  ◦ different conditions can lead to the different prices for the same output—NO SUPPLY curve Misconceptions Concerning Monopoly Pricing  2 fallacies  1. Not Highest Price-monopolist seeks max profit not max price, some high prices that could be charged reduce sales and thus reduce profit 2. Total, Not Unit, Profit-seeks max total profit NOT max unit profit ◦ five units sold at $28 is better than 4 at $32 simultaneous consumption-The same-time derivation of utility from some product by a large number of consumers. network effects- Increases in the value of a product to each user, including existing users, a s the total number of users rises. X-inefficeincy -  The production of output, whatever its level, at a higher average (and total ) cost than is necessary for producing that level of output. rent-seeking behaviors-The actions by persons, firms, or unions to gain special benefits from government at the taxpayers'  or someone else's expense. price discrimination -: The selling of a product to different buyers at different prices when the price differences are not justified by differences in cost. socially optimal price-The price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of the product. fair-return price-For natural monopolies subject to rate (price) regulation, the price that would allow the regulated  monopoly to earn a normal profit; a price equal to average total cost. CHAPTER 13 MONOPOLISTIC COMPETITION **in the US, most industries have a market structure that falls between the 2 poles of 1. pure competition 2. pure monopoly ◦ they have fewer firms than required for pure competition, and more than one, which is required to be a pure monopoly ◦ most firms in most industries have distinguishable rather than standardized products  ◦ most firms in most industries have some discretion over the prices they charge ◦ entry ranges from easy to very difficult, but is rarely completely blocked ◦ all of these reasons make them fall between the two poles THIS CHAPTER EXAMINES 2 MODELS THAT MORE CLOSELY APPROXIMATE THESE WIDESPREAD STRUCTURES 1. MONOPOLISTIC COMPETITION-(large amounts of competition, small amount of monopoly power)—they are more competitive than monopolistic  2. OLIGOPOLY-(large amounts of monopoly power, with large amounts of competition, rivalry against existing competitors and threat of increased future competition due to foreign firms and new tech.) monopolistic competition -A market structure in which many firms sell a differentiated product, entry is relatively easy, each firm has some control over its product price, and there is considerable nonprice competition 1. relatively large number of sellers ◦ competitive characteristic  ◦ small market shares-each firm has small percentage of market share-thus limited control over price ◦ no collusion-since there is a relatively large number of firms collusion is unlikely  ◦ independent action-numerous firms=no feeling of interdependence—>each firm can choose its own pricing strategy without considering the possible reactions of rival firms-one firms price cut imperceptibly effects competitors sales  2. differentiated products ◦ unlike pure competition, which has standardized products ◦ turn out variations of a particular product ◦ monopolistic characteristic ◦ often promoted by heavy advertising  ◦ product attributes-the ways in which they are differentiated  ▪ service-experts in store, serve yourself, speed ▪ location-convenient stores, motels closer to the highway ▪ brand names & packaging-trademarks, brand names, celebrity connections ▪ some control over price-despite the amount of firms, monopolistic competitors have some control over price b/c of product differentiation-if consumers prefer a specific brand, within reason, they will pay more for that brand  3. easy entry and exit from the industry ◦ competitive characteristic  ◦ easy compared to oligopoly/pure monopoly ◦ economics of scale are few/rare—>capital requirements are low product differentiation- A strategy in which one firm's product is distinguished from competing products by means of its d esign, related services, quality, location, or other attributes (except price). nonprice competition-  Competition based on distinguishing one's product by means of product differentiation and then advertising the distinguished product to consumers.—goal of product differentiation— make price less a factor and product differences more a factor • monopolistic competitors advertise their products heavily, product differentiation is pointless if consumers aren’t made aware of the differences • if successful firms demand curve shifts right and becomes less elastic TO DISTINGUISH B/T MONOP.COMP & OLIGOPOLY 2 WAYS/MEASURES 1. four-firm concentration ratio- The percentage of total industry sales accounted for by the top four firms in an industry. ◦ 4-firm concentration ratio=(output 4 largest firms)/(total output in industry) ▪ very low in purely competitive industries (1000s of firms in these industries) ▪ high in oligopoly and pure monopoly ▪ four firms account for 40%of market or more=oligopoly ▪ less than 40%=monopolistic competitors  ▪ careful here because some firms may rank low nationally but have a local focus, in which they do account for most of the market 2. Herfindahl index- A measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of th e individual firms in the industry. ◦ H.I.=(%S1)^2 + (%S2)^2+…+(%Sn)^2 ▪ where %S1 is the percentage of market share of firm 1 ▪ squaring the percentage gives greater weight to larger and more powerful firms ▪ purely competitive—>index approaches zero (squaring tiny numbers makes tinier numbers) ▪ pure monopoly—>index-10,000 (100)^2 ▪ lower the index—>likely monopolistic competitor ▪ higher the index—>oligopoly  PRICE OUTPUT IN MONOP.COMP monop.comp.demand curve- • highly elastic (not perfectly) • precisely this that distinguishes mopolistic competition from both pure monopoly and pure completion  • more elastic b/c it has competitors that produce close substitutes • greater the number of rivals & weaker the product differentiation = higher the elasticity ——>closer it is to pure competition (which has perfect elasticity) THE SHORT RUN:PROFIT OR LOSS (monopolistic competition) • MR=MC—>to minimize loss or max profit in the short (not P=MC) • can realize economic profit or loss in the short  • make sure you know how to determine this from a graph (key graph 13.1) THE LONG RUN: ONLY A NORMAL PROFIT (monopolistic competition) • will only break even in the long run (only NORMAL PROFIT=break even) • will enter a monop.comp industry as a profitable firm and exit as an unprofitable one—>only earn normal profit • remember cost curves include both explicit and implicit costs, including a normal profit ◦ when new rivals enter their demand curve shifts left (falls) ▪ why? ▪ b/c each firm has a smaller share of total demand and now faces a larger number of close substitute products ▪ this decline in demand reduces economic profit ▪ when the entry of new firms has reduced demand to the extent that the demand curve is tangent to the average total cost curve at the profit maximizing output, the firm is just making normal profit  ▪ ^^see figure 13.1 c ▪ at the point of tangency (demand curve tangent to ATC) total revenue=total cost ▪ the economic profit is now gone and there NO incentive for any new firms to enter ◦ firms will leave in the long run when industry suffers loss in the short ▪ remaining firms reap the benefits of greater share of demand and less rival substitute products ▪ their demand curves shift right (rise) ▪ loss disappears and gives rise to normal profit ◦ complications with the above model ▪ in the real world firms may achieve significant enough product differentiation that other firms cannot make close substitutes ▪ these firms may have sufficient enough monopoly power to realize economic profit in the  long run ▪ entry into industries populated by small firms is not as easy in reality as in theory ▪ product differentiation creates stronger financial barriers to entry than if they were standardized  ▪ this suggests some monopoly power with small economic profits continuing even in the long run MONOPOLISTIC CONPETITION & EFFICIENCY **monop.comp delivers neither allocative nor productive efficiency   • recall—>economic efficiency requires each firm to produce the amount of output at which P = MC = minimum ATC • P = min. ATC yields PRODUCTIVE EFFICIENCY ◦  the good is being produced in the least costly way ◦ and the price is just sufficient to cover average total cost, including normal profit • P = MC yields ALLOCATIVE EFFICIENCY  ◦ the right amount of output is being produced  ▪ thus the right amount of societies scarce resources is being devoted to this specific use  • NOW: Monopolistic Competition  ◦ yield neither ◦ profit maximizing price exceeds the lowest ATC ◦ therefore the in producing the profit maxing output, the firms ATC is slightly higher than optimal from societies perspective ▪ productive efficiency is not achieved ▪ P > min. ATC ◦ profit maxing price exceeds marginal cost= under allocation of resources  ◦ to measure this inefficiency notice that the allocatively optimal amount of output occurs where D curve intersects MC curve  ◦ so for all output b/t chosen Q and point  c ( where D intersects MC) MB exceeds MC ▪ allocative efficiency is not achieved  ▪ creates efficiency loss (DEADWEIGHT LOSS) ◦ MUST SEE KEY GRAPH 13.2 ◦ total efficiency loss= sum of each firm’s loss in the industry  excess capacity-Plant resources that are underused when imperfectly competitive firms produce less output than that associated with achieving minimum average total cost.  • the gap between min ATC output & profit maxing output • see graph 13.2 • b/c firms are producing less than min ATC output  PRODUCT VARIETY • monop.comps ability to deliver product differentiation helps compensate for its failure to deliver economic efficiency  • producers meet the wide variation in consumers tastes  • PRODUCT DIFFERENTIATION creates a trade off b/t CONSUMER CHOICE & PRODUCTIVE EFFICIENCY ◦ stronger the product diff. the greater the excess capacity and thus the greater is the productive Inefficiency  ◦ BUT the greater the product diff. the more likely it is that the firms will satisfy the great diversity if consumer tastes  ◦ so the GREATER EXCESS CAPACITY PROBLEM = the WIDER RANGE OF CONSUMER CHOICE  CHAPTER 13 OLIGOPOLY OLIGOPOLY Competition Scale  • pure competition—>monop.comp—>oligopoly—>pure monopoly oligopoly -A market structure in which a few firms sell either a standardized or differentiated product,  into which entry is difficult, in which the firm has limited control over prod uct price because of mutual interdependence (except when there is collusion among firms), and in which there is typicall y nonprice competition. oligopoly characteristics- • A Few Large Producers ◦ thus, they have considerable control over price ◦ but they have to consider the reaction of other firms to their pricing, output, and advertising decisions  • Homogeneous or Differentiated Products ◦ Homogeneous Oligopoly ◦ Differentiated Oligopoly • Control over Price, but Mutual Interdependence  ◦ strategic behavior ◦ mutual interdependence  • Entry Barriers homogeneous oligopoly- An  oligopoly in which firms produce a standardized product. differentiated oligopoly -An oligopoly in which firms produce a differentiated product. strategic behavior-Self- interested economic actions that take into account the expected reactions  of others. mutual interdependence-A situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms). Any firm that  makes such a change can expect its rivals to react to the change. interindustry competition-  The competition for sales between the products of one industry and the products of another industry. import competition-The competition that domestic firms encounter from the products and services of foreign producers. game theory- The study of how people behave in strategic situations in which individuals  must take into account not only their own possible actions but also the po ssible reactions of others. Originally developed to analyze the best ways to  play games like poker and chess. collusion-A situation in which firms act together and in agreement (collude) to fix prices, divide a market, or otherwise restrict competition. kinked-demand curve- A demand curve that has a flatter slope above the current price than below the current price. Applies to a noncollusive oligopoly firm if its rivals will match any price decrease but ignore any price increase . price war- Successive, competitive, and continued decreases in the prices charged by firms in an oligopolistic industry. At each stage of the price war, one firm lowers its price below its rivals' price, hoping to increase its sales and reve nues at its rivals' expense. The war ends when the price decreases cease. cartel-A formal agreement among firms (or countries) in an industry to set the price of a product and establish the outputs of the individual firms (or countries)  or to divide the market for the product geographically. price leadership-An informal method that firms in an oligopoly may employ to set the price of their product: One firm (the leader) is the first to announce a change in p rice, and the other firms (the followers) soon announce identical or similar  changes. CHAPTER 15 WAGE DETERMINATION wage rate-see wage nominal wage-he amount of money received by a worker per unit of time (hour, day, etc.); money wage. real wage-The amount of goods and services a worker can purchase with his or her nominal wage; the purchasing power of the nominal wage. purely competitive labor market-A resource market in which many firms compete with one another in hiring a specific kind of labor, numerous equally qualified workers supply that labor, and no one co ntrols the market wage rate monopsony- A market structure in which there is only a single buyer of a good, service, or resource. exclusive unionism-The policy, pursued by many craft unions, in which a union first gets employers to agree to hire only union workers and then excludes  many workers from joining the union so as to restrict the supply of labor a nd drive up wages. Compare with inclusive unionism. The policies typically employed by a craft union. occupational licensing - The laws of state or local governments that require that a worker satisfy ce rtain specified requirements and obtain a license from a licensing board be fore engaging in a particular occupation. inclusive unionism- The policy, pursued by industrial unions, in which a union attempts to include every worker in a given industry so as to be able to restrict the entire industry's labor supply and thereby ra ise wages. Compare with exclusive unionism. bilateral monopoly-A market in which there is a single seller (monopoly) and a single buyer (monopsony). minimum wage- The lowest wage that employers may legally pay for an hour of work. wage differentials -The difference between the wage received by one worker or group of workers and that received by another  worker or group of workers. marginal revenue productivity-see marginal revenue product noncompeting groups-  Collections of workers who do not compete with each other for employme nt because the skill and training of the workers in one group are substantia lly different from those of the workers in other groups. human capital -The knowledge and skills that make a person productive. compensating differences- Differences in the wages received by workers in different jobs to compensate for the nonmonetary d ifferences between the jobs. principal-agent problem- • (1) At a firm, a conflict of interest that occurs when agents (workers or managers)  pursue their own objectives to the detriment of the principals' (stock holders') goals. • (2) In public choice theory, a conflict of interest that arises when elected of ficials (who are the agents of the people) pursue policies that are in t heir own interests rather than policies that would be in the better inte rests of the public (the principals). incentive pay plan-  A compensation structure that ties worker pay directly to performance. Su ch plans include piece rates, bonuses, stock options, commissions, and profit-sharing plans. CHAPTER 21 INCOME INEQUALITY, POVERTY, & DISCRIMINATION income inequality -The unequal distribution of an economy's total income among households or families. Lorenz curve- A curve showing the distribution of income in an economy. The cumulated  percentage of families (income receivers) is measured along the horizontal  axis and the cumulated percentage of income is measured along the vertic al axis. Gini ratio-A numerical measure of the overall dispersion of income among households, families, or individuals; found graphically by dividing the area between the  diagonal line and the Lorenz curve by the entire area below the diagonal line. income mobility-The extent to which income receivers move from one part of the income distribution to another over so me period of time. noncash transfers-A government transfer payment in the form of goods and services rather than money, for example, food stamps, housing assistance, and job training; al so called in-kind transfers. equality-efficiency trade-off-The decrease in economic efficiency that may accompany a decrease in income inequality; the presumption that some income inequality is required to achieve econo mic efficiency. poverty rate-  The percentage of the population with incomes below the official poverty i ncome levels that are established by the federal government. entitlement programs- Government programs such as <i>social insurance, Medicare, and Medicaid that guarantee (entitle) particular levels of transfer payments or noncash b enefits to all who fit the programs' criteria. social insurance programs- Programs that replace the earnings lost when people retire or are temporar ily unemployed, that are financed by payroll taxes, and that are viewed as earned rights (rather than charity). social security- The social insurance program in the United States financed by federal payroll taxes on employers and employees and designed to replace a portion of the ear nings lost when workers become disabled, retire, or die. medicare-A federal program that provides for • (1) compulsory hospital insurance for senior citizens, • (2) low- cost voluntary insurance to help older Americans pay physicians' fee s, and • (3) subsidized insurance to buy prescription drugs. Financed by payroll taxes unemployment compensation-see unemployment insurance  public assistance programs -  Government programs that pay benefits to those who are unable to earn income (because of permanent disabilities or because they have very low income  and dependent children); financed by general tax revenues and viewed as public charity (rather than earned rights). Supplemental Security Income (SSI)-  A federally financed and administered program that provides a uniform na tionwide minimum income for the aged, blind, and disabled who do not qualify for benefits under Social Security in the United States. Temporary Assistance for Needy Families (TANF)-A state- administered and partly federally funded program in the United States that  provides financial aid to poor families; the basic welfare program for low- income families in the United States; contains time limits and work require ments. Supplemental Nutrition Assistance Programs (SNAP)-  A government program that provides food money to low- income recipients by depositing electronic money onto Electronic Benefit Transfer(EBT) cards. Formerly known as the food- stamp program. Medicaid- A federal program that helps finance the medical expenses of individuals c overed by the Supplemental Security Income (SSI) and Temporary Assistance for Needy Families (TANF) programs. earned-income tax credit (EITC)-A refundable federal tax credit for low- income working people designed to reduce poverty and encourage labor- force participation. discrimination- The practice of according individuals or groups inferior treatment in hiring,  occupational access, education and training, promotion, wage rates, or wo rking conditions even though they have the same abilities, education, skills , and work experience as other workers. taste-for-discrimination model- A theory that views discrimination as a preference for which an employer i s willing to pay. discrimination coefficient - A measure of the cost or disutility of prejudice; the monetary amount an e mployer is willing to pay to hire a preferred worker rather than a nonpreferr ed worker of the same ability. statistical discrimination- The practice of judging an individual on the basis of the average characteri stics of the group to which he or she belongs rather than on his or her own  personal characteristics. occupational segregation- The crowding of women or minorities into less desirable, lower- paying occupations. CHAPTER 22 HEALTH CARE Patient Protection & Affordable Care Act (PPACA)- A major health care law passed by the federal government in 2010. Major  provisions include an individual health insurance mandate, a ban on insure rs refusing to accept patients with preexisting conditions, and federal (rath er than state) regulation of health insurance policies. national health insurance- A program in which a nation's government provides a basic package of he alth care to all citizens at no direct charge or at a low cost- sharing level. Financing is out of general tax revenues. deductibles-  The dollar sum of (for example, health care) costs that an insured individu al must pay before the insurer begins to pay. copayments- The percentage of (say, health care) costs that an insured individual pays  while the insurer pays the remainder. fee for service- In the health care industry, payment to physicians for each visit made or procedure performe d. defensive medicine- The recommendation by physicians of more tests and procedures than are  warranted medically or economically as a way of protecting themselves a gainst later malpractice suits. tax subsidy-A grant in the form of reduced taxes through favorable tax treatment. For example, employer- paid health insurance is exempt from federal income taxes and payroll taxes. health savings accounts (HSAs)- Tax- free savings accounts into which people with high- deductible health insurance plans can place funds each year. Accumulate d funds can be used to pay out-of-pocket medical expenses such as deductibles and copayments. Unused funds accumulate from year to year and can be used  after retirement to supplement Medicare. preferred provider organizations (PPOs)- An arrangement in which doctors and hospitals agree to provide health car e to insured individuals at rates negotiated with an insurer. health maintenance organizations (HMOs)-  Health care providers that contract with employers, insurance companies,  labor unions, or government units to provide health care for their workers  or others who are insured. diagnosis-related-group (DRG) system-  Payments to doctors and hospitals under Medicare based on which of hundreds of carefully detailed diagnostic categories be st characterize each patient's condition and needs. employer mandate- The requirement under the Patient Protection and Affordable Care Act (PPACA) of 2010 that firms with 50 or more employees pay for insurance p olicies for their employees or face a fine of $2,000 per employee per year.  Firms with fewer than 50 employees are exempt. personal mandate-The requirement under the Patient Protection and Affordable Care Act (PPACA) of 2010 that all U.S. citizens and legal residents purchase health i nsurance unless they are already covered by employer- sponsored health insurance or government- sponsored health insurance (Medicaid or Medicare) insurance exchanges-Government- regulated markets for health insurance in which individuals seeking to purc hase health insurance to comply with the personal mandate of the Patient Protection and Affordable Care Act (PPACA) of 2010 will be able to comparison shop among insurance policie s approved by regulators. Each state will have its own exchange. CHAPTER 23 IMMIGRATION economic immigrants- International migrants who have moved from one country to another to obt ain economic gains such as better employment opportunities. legal immigrants-  A person who lawfully enters a country for the purpose of residing there. illegal immigrants-  People who have entered a country unlawfully to reside there; also called  unauthorized immigrants. H1-B provision-  A provision of the U.S. immigration law that allows the annual entry of 65, 000 high-skilled workers in “specialty occupations” such as science, R&D, and computer programming to work legally and continuously in the United  States for six years. human capital-The knowledge and skills that make a person productive. beaten paths-  Migration routes taken previously by family, relatives, friends, and other m igrants. backflows- The return of workers to the countries from which they originally emigrated . skill transferability - The ease with which people can shift their work talents from one job, regio n, or country to another job, region, or country. self-selection- As it relates to international migration, the idea that those who choose to  move to a new country tend to have greater motivation for economic gain  or greater willingness to sacrifice current consumption for future consumpt ion than those with similar skills who choose to remain at home. efficiency gains from migration-  The increases in total worldwide output that take place if the additions to  output from immigration in the destination nation exceed the loss of output from emigration from the origin nation. brain drains-The exit or emigration of highly educated, highly skilled workers from a country. remittances- Payments by immigrants to family members and others located in the immigrants' home countries. complementary resources- Productive inputs that are used jointly with other inputs in the production p rocess; resources for which a decrease in the price of one leads to an increase in the demand for the other. substitute resources- Productive inputs that can be used instead of other inputs in the productio n process; resources for which an increase in the price of one leads to an increase in the demand for the other. negative self-selection- As it relates to international migration, the idea that those who choose to  move to another country have poorer wage opportunities in the origin country than those with similar skills who choos e not to emigrate compensating wage differential-see compensating differences 


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