Colander Microeconomics Chapters 6-10 Terms

Cross-Price Elasticity of Demand

The percentage change in demand divided by the percentage change in the price of a related good

Income Elasticity of Demand

The percentage change in demand divided by the percentage change in income

Normal Good

Good whose consumption increases with an increase in income

Luxury

A good that has an income elasticity greater than 1

Inferior Good

Good whose consumption decreases when income increases

Substitute

A good that can be used in place of another good

Complements

Goods that are used in conjunction with other goods

Price Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in price

Price Elasticity of Supply

The percentage change in quantity supplied divided by the percentage change in price

Elastic

The percentage change in quantity is greater than the percentage change in price (E > 1)

Inelastic

The percentage change in quantity is less than the percentage change in price (E < 1)

Endpoint Problem

The percentage change differs depending on whether you view the change as a rise

or a decline

Perfectly Inelastic

Quantity does not respond at all to changes in price (E = 0)

Perfectly Elastic

Quantity responds enormously to changes in price (E = ∞)

Unit Elastic

The percentage change in quantity is equal to the percentage change in price (E = 1)

Consumer Surplus

The difference between what consumers would have been willing to pay and what they actually pay. Also, the value the consumer gets from buying a product less its price

Producer Surplus

Price the producer sells a product for less the cost of producing it

The Burden of Taxation.

The limitations that taxes place on trade

Deadweight Loss

The loss of consumer and producer surplus from a tax

Welfare Loss Triangle

A geometric representation of the welfare cost in terms of misallocated resources caused by a deviation from a supply/demand equilibrium

Excise Tax

A tax that is levied on a specific good

Price Ceiling

A government-imposed limit on how high a price can be charged. In other words, a government-set price below the market equilibrium price

Price Floor

A government-imposed limit on how low a price can be charged. In other words, a government-set price above equilibrium price

Rationing

Limiting the demand or increasing the supply in the case of price ceilings, and limiting the supply or increasing the demand in the case of price floors

Black Markets

Markets in which individuals buy or sell illegally

Rent-Seeking Activity

Activity designed to transfer surplus from one group to another

Public Choice Economist

An economist who integrates an economic analysis of politics with an analysis of the economy

General Rule of Political Economy

When small groups are helped by a government action and large groups are hurt by that same action, the small group tends to lobby far more effectively than the large group

Laissez-Faire

Government noninvolvement in the economy

Invisible Hand Framework

It says that if markets are perfectly competitive, they will lead individuals to make voluntary choices that are in the society's interest. It is as if individuals are guided by an invisible hand to do what society wants them to do

Market Failure

A situation in which the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes

Government Failure

A situation in which the government intervention in the market to improve market failure actually makes the situation worse

Externality

An effect of a decision on a third party not taken into account by the decision maker

Negative Externality

The adverse effect of a decision on others not taken into account by the decision maker. When the effects of a decision not taken into account by the decision maker are detrimental to others

Positive Externality

The positive effect of a decision on others not taken into account by the decision maker. Also, when the effects of a decision not taken into account by the decision maker are beneficial to others

Marginal Social Cost

The marginal private costs of production plus the cost of the negative externalities associated with that production

Marginal Social Benefit

The marginal private benefit of consuming a good plus the benefits of the positive externalities resulting from consuming that good

Direct Regulation

A program in which the amount of a good people are allowed to use is directly limited by the government

Efficient

Achieving a goal at the lowest cost in total resources without consideration as to who pays those costs

Inefficient

Achieving a goal in a more costly manner than necessary

Tax Incentive Program

A program using a tax to create incentives for individuals to structure their activities in a way that is consistent with the desired ends

Effluent Fees

Charges imposed by government on the level of pollution created

Market Incentive Plan

A plan requiring market participants to certify that they have reduced total consumption—not necessarily their own individual consumption—by a specified amount

Sin Taxes

Taxes on goods government believes to be harmful

Free Rider Problem

Individuals’ unwillingness to share in the cost of a public good

Optimal Policy

A policy in which the marginal cost of a policy equals the marginal benefit of that policy

Optimal Level of Pollution

The amount of pollution at which the marginal benefit of reducing pollution equals the marginal cost

Public Good

A good that if supplied to one person must be supplied to all and whose consumption by one individual does not prevent its consumption by another individual. That is, a good that is nonexclusive and nonrival

Adverse Selection Problem

A problem that occurs when buyers and sellers have different amounts of information about the good for sale

Moral Hazard Problem

A problem that arises when people don’t have to bear the negative consequences of their actions

Signaling

An action taken by an informed party that reveals information to an uninformed party and thereby partially offsets adverse selection

Screening

An action taken by an uninformed party that induces the informed party to reveal information

Consumer Sovereignty

The right of the individual to make choices about what is consumed and produced

Comparative Advantage

The ability to be better suited to the production of one good than to the production of another good

Balance of Trade

The difference between the value of the goods and services a country imports and the value of the goods and services it exports

Inherent Comparative Advantage

Comparative advantage that is based on factors that are relatively unchangeable

Transferable Comparative Advantage

Comparative advantage based on factors that can change relatively easily

Law of One Price

In a competitive market, there will be pressure for equal factors to be priced equally

Trade Deficit

When imports exceed exports

Trade Surplus

When exports exceed imports

Exchange Rate

The price of one country’s currency in terms of another currency

Currency Depreciation

A change in the exchange rate so that one currency buys fewer units of a foreign currency

Currency Appreciation

A change in the exchange rate so that one currency buys more units of a foreign currency

Tradable Goods

Those goods that can be produced in one country and sold in another

Resource Curse

The paradox that countries with an abundance of resources tend to have lower economic growth and more unemployment than countries with fewer natural resources

Exports

The value of goods and services sold abroad

Imports

The value of goods and services purchased abroad

Debtor

Borrowing significantly more than it has lent

Creditor

Of having a flow of interest income

Tariff

A tax that governments place on internationally traded goods, also called customs duties

General Agreement on Tariffs and Trade (GATT)

A regular international conference to reduce trade barriers, established in 1947 and replaced with the World Trade Organization in 1995

World Trade Organization (WTO)

An organization whose functions are generally the same as GATT’s were—to promote free and fair trade among countries

Quota

A quantity limit placed on imports

Sanction

A restriction on the imports or exports of a country’s goods

Regulatory Trade Restrictions

Government-imposed procedural rules that limit imports

Trade Adjustment Assistance Programs

Programs designed to compensate losers for reductions in trade restrictions

Strategic Bargaining

Demanding a larger share of the gains from trade than you can reasonably expect

Strategic Trade Policy

Threatening to implement tariffs to bring about a reduction in tariffs or some other concession from the other country

Learning by Doing

As we do something, we learn what works and what doesn’t, and over time we become more proficient at it. Also, to improve the methods of production through experience

Economies of Scale

Situation when long-run average total costs decrease as output increases

Infant Industry Argument

The argument that with initial protection, an industry will be able to become competitive

Transshipments

Countries that simply have another country buy the goods for them, a third-party sale

Free Trade Association

A group of countries that have reduced or eliminated trade barriers among themselves