Economics Midterm 2 Review

Vocabulary practice flashcards covering microeconomics topics from Midterm 2 lecture notes, including price controls, degrees of price discrimination, elasticity rules, and market pricing strategies.

Signals

Ways people show their economic or social status through what they buy, wear, drive, or where they go to school (e.g., driving an expensive car or wearing designer clothes).

Price Ceiling

The maximum price the government allows sellers to charge. When set below equilibrium, it creates a shortage.

Elastic Demand

A condition where quantity demanded changes by a larger percentage than price changes (e.g., a small increase in the price of luxury items causes a large decrease in demand).

Second-Degree Price Discrimination

Charging the same customer different prices per unit based on the amount purchased or pricing option chosen (e.g., buying in bulk for a cheaper price or using a Safeway Card).

Quintiles

A division of a population into $5$ equal groups of $20\%$, based on income.

Seasonal Price Variations

Prices that change depending on the time of year or season (e.g., electricity rates being higher during peak summer months).

Economic Mobility

The ability of people to move up or down in economic status, measured by income (e.g., someone from a low-income family graduating from college and getting a higher-paying job).

Total Revenue Test: Elastic Demand

When demand is elastic, price and total revenue move in opposite directions: an increase in price leads to a decrease in total revenue, and a decrease in price leads to an increase in total revenue.

Total Revenue Test: Inelastic Demand

When demand is inelastic, price and total revenue move in the same direction: an increase in price leads to an increase in total revenue, and a decrease in price leads to a decrease in total revenue.

Total Revenue Test: Unit Elastic Demand

When demand is unit elastic, an increase or decrease in price causes total revenue to stay the same.

First-Degree Price Discrimination

Charging each customer the maximum amount they are willing to pay.

Decoy Pricing

When businesses add a third, less attractive option to make another option look like a better deal (e.g., pricing a small popcorn at $\$3$, a large at $\$7$, and a medium at $\$6.50$ to make the large look like a better deal).

Price Theory

An economic theory explaining how supply, demand, cost, and consumer choice determine prices and how prices influence distribution.

Income Elasticity

A metric measuring how quantity demanded changes when consumer income changes.

Normal Goods

Goods with positive income elasticity, meaning people buy more of them when their income increases.

Inferior Goods

Goods with negative income elasticity, meaning people buy less of them when their income increases.

Inverted Block Rate Structure

A utility pricing structure where the price per unit increases as more units are consumed.

Three Rules for Elasticity of Demand

The three determinants of price elasticity of demand: substitutes, necessity, and time.

Price Floor

The minimum price the government allows sellers to charge. When set above equilibrium, it causes a surplus.

Third-Degree Price Discrimination

Charging different groups of customers different prices for the same product or service (e.g., a movie theater charging seniors a different price).