Economics: Elasticity, Resource Allocation, and Market Efficiency

Vocabulary flashcards covering elasticity formulas, resource allocation systems, and market surplus concepts from Chapter 1 through Chapter 8 of the lecture transcript.

Price Elasticity

A measure of how much the quantity of a good changes relative to a change in price, calculated as percent change in quantity divided by percent change in price.

Elastic Good

A good with a price elasticity greater than $1$, where consumers are highly responsive to changes in price.

Inelastic Good

A good with a price elasticity less than $1$, where quantity demanded changes relatively little when price changes (e.g., necessities like medicine, gas, or electricity).

Income Elasticity

A measure of how quantity demanded changes relative to a change in consumer income, calculated with quantity on top and income on the bottom.

Normal Good

A good with an income elasticity greater than zero ($> 0$), meaning spending on the good increases as income increases.

Inferior Good

A good with an income elasticity less than zero ($< 0$), meaning spending on the good decreases as income increases.

Income Inelastic Good

A normal good with an income elasticity between zero and one ($0 < \text{elasticity} < 1$).

Income Elastic Good

A normal good with an income elasticity greater than one ($> 1$).

Cross Price Elasticity

A measure of the relationship between two goods showing how quantity demanded of one good changes when the price of another good changes.

Substitute Good

A good with a positive cross price elasticity relative to another good, meaning an increase in the price of one leads to higher consumption of the other.

Complement Good

A good with a negative cross price elasticity relative to another good, meaning an increase in the price of one leads to lower consumption of the other.

Command System

A method of allocating resources where directives and tasks are passed down through a clear chain of authority or bosses.

Majority Rule

A system that allocates resources or selects policies through voting and elected representatives to reflect broader public decisions.

Contest

A resource allocation method that distributes rewards or resources to winners based on performance or outcome.

First Come, First Serve

An allocation method based on sequence and arrival order rather than willingness to pay.

Lottery

An allocation system that distributes resources or opportunities to winning individuals based on random chance.

Personal Characteristics

An allocation method based on individual attributes or relationships, which can lead to negative outcomes like discrimination if misused.

Force

An allocation mechanism relying on legal frameworks, taxation enforcement, coercion, or war to redistribute resources.

Marginal Benefit

The added value or benefit derived from consuming one additional unit of a good or service.

Value

The maximum price a consumer is willing to pay for a good or service.

Price

The actual dollar amount paid by a buyer or received by a seller for a good or service.

Consumer Surplus

The excess benefit received from a good over the price paid for it, calculated as marginal benefit minus price, represented by the area under the demand curve and above the market price.

Marginal Cost

The cost of producing one additional unit of output, which represents the minimum price a firm is willing to accept.

Producer Surplus

The excess amount received by sellers above their cost of production, calculated as price received minus marginal cost, represented by the area below the market price and above the supply curve.

Total Surplus

The sum of consumer surplus and producer surplus, representing the overall value of societal welfare generated by a market.