ECON ch. 5, 6, 18 (midterm 2)

willingness to pay (reservation price)

the maximum price that a buyer would be willing to pay for a good or service

willingness to sell

the minimum price that a seller is willing to accept in exchange for a good or service

surplus

a way of measuring who benefits from transactions and by how much

consumer surplus

the net benefit that a consumer receives from purchasing a good or service, measured by the difference between willingness to pay and the actual price

producer surplus

the net benefit that a producer receives from the sale of a good or service, measured by the difference between the producer’s willingness to sell and the actual price

total surplus

a measure of the combined benefits that everyone receives from participating in an exchange of goods or services

zero-sum game

a situation in which whenever one person gains, another loses an equal amount, such that the net value of any transaction is zero

efficient market

an arrangement such that no exchange can make anyone better off without someone becoming worse off

deadweight loss

a loss of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity

market failures

situations in which the assumption of efficient, competitive markets fails to hold

price control

a regulation that sets a maximum or minimum legal price for a particular good

price ceiling

a maximum legal price at which a good can be sold

welfare effects

changes in the economic well-being of market participants, as measured by changes in consumer surplus or producer surplus like deadweight loss

price floor

a minimum legal price at which a good can be sold

tax wedge

the difference between the price paid by buyers and the price received by sellers in the presence of a tax

Equation: tax wedge = P buyers - P sellers = Tax

government tax revenue

Government tax revenue = tax x Q post-tax

tax incidence

the relative tax burden borne by buyers and sellers

subsidy

a requirement that the government pay an extra amount to producers or consumers of a good

government subsidy expenditure

Government subsidy expenditure = Subsidy x Q post subsidy