Micro Prelim 2

relative price

the value of a good in terms of other goods

allocation mechanism

how the question of "who gets the goods" gets answered

traditional economic system

an economic system where decisions are made based on customs

autocratic/command and control economic system

an economic system where decisions are made by a government or a bureaucracy or one individual

market system

an economic system where decisions are made based on mutually beneficial and voluntary exchange

perfect competition

a market structure where 1. many buyers and many sellers, a homogenous product, perfect information & free entry & exit

demand

the various quantities of a specific good that consumers are willing and able to purchase at various prices

law of demand

as the price of a good rises, the quantity demanded falls

supply

the various quantities of a specific good producers are willing and able to sell at various prices

alexander's law of supply

because per unit production costs increase as more output is produced, businesses need to receive a higher per unit price to get them to produce more output

ceteris paribus

Latin for everything else held constant

equilibrium

a situation from which there is no tendency for change

shortage/excess demand

when the quantity demanded is greater than the quantity supplied at the prevailing price

surplus/excess supply

when the quantity supplied is greater than the quantity demanded at the prevailing price

substitute

goods used as alternatives to one another

complement

goods used together as a package

normal good

goods for which an increase in income leads to an increase in demand

inferior good

goods for which an increase in income leads to a decrease in demand

expectations

perceptions of what the future holds

price floor/effective price floor

a government-imposed minimum price. to be effective, it must be set above the market clearing price

price ceiling/effective price ceiling

a government-imposed maximum price. to be effective, it must be set below the market clearing price

momentary supply

the quantity supplied available at a specific moment in time

short-run supply

the various quantities of a specific good producers are willing and able to sell at various prices in the short run

long-run supply

the various quantities of a specific good producers are willing and able to sell at various prices in the long run

quota

a government limit on the amount that can be produced, consumed, and exchanged

tax

a government policy that typically increases price to consumers and decreases price to producers to curtail behavior and collect revenue

negative consumption externality

a bad thing that consumers are doing while consuming a product that affects others, but is not taken into account by the market participants

negative production externality

a bad thing that producers are doing while producing a product that affects others, but is not taken into account by the market participants

subsidy

a government policy that typically increases price to producers and decreases price to consumers to promote behavior

positive consumption externality

a good thing that affects others that consumers are doing while consuming a product, but is not taken into account by the market participants

positive production externality

a good thing that affects others that producers are doing while producing a product, but is not taken into account by the market participants

consumer's burden from a tax

the share of the government's revenue from a tax that is due to the increase in price to consumers

producer's burden from a tax

the share of the government's revenue from a tax that is due to the decrease in price to producers

consumer's benefit from a subsidy

the share of the government's expenditures on a subsidy that is due to the decrease in price to consumers

producer's benefit from a subsidy

the share of the government's expenditures on a subsidy that is due to the increase in price to producers

price elasticity of demand

measures the percent change in the quantity demanded from a given percent change in the price

point method

using the initial value as the point of reference for a percent change calculation

arc method (mid-point method)

using the average of the initial and end values as the point of reference for a percent change calculation

elastic demand

when the percent change in quantity demanded is greater than the percent change in price that induced it

perfectly elastic demand

when the price elasticity of demand is negative infinity

inelastic demand

when the percent change in quantity demanded is less than the percent change in price that induced it

perfectly inelastic demand

when the price elasticity of demand is zero

unit elastic demand

when the price elasticity of demand is -1

income elasticity

percent change in demand from a given percent change in income (%∆Q/%∆Y)

cross price elasticity

percent change in demand for 1 good from a given percent change in the price of a different good (%∆Qx/%∆Pz)

elasticity of supply

percent change in the quantity supplied from a given percent change in the price of a good (%∆Q/%∆P)