ECO 2021 midterm 1

Production Possibility Frontier (PPF)

A curve that shows the maximum attainable combinations of two goods that can be produced with available resources.

Attainable Points

Any point inside or on the PPF, which indicates that production is possible with given resources.

Efficient Points

Any point on the PPF, indicating that resources are used efficiently.

Unattainable Points

Any point outside of the PPF, indicating that there are not enough resources to produce that combination of goods.

Allocative Efficiency

When a production point not only is efficient but also maximizes total benefit to society.

Misallocation of Resources

The inefficient distribution of resources, often leading to unemployment or underemployment.

Opportunity Cost

The next best alternative foregone when a choice is made; it represents what you give up.

Law of Increasing Opportunity Costs

As the production of one good increases, the opportunity cost of producing that good also increases.

Bowed-Out PPF

A PPF that reflects increasing opportunity costs as you produce more of one good.

Straight-Line PPF

A PPF that indicates constant opportunity costs.

Shift in PPF

Occurs due to changes in resources or technology affecting production capabilities.

Marginal Social Benefit (MSB)

The additional benefit received by society from the consumption of one more unit of a good.

Marginal Social Cost (MSC)

The additional cost to society of producing one more unit of a good.

Quantity Demanded

The amount of a good or service consumers are willing to purchase at a given price.

Law of Demand

As price rises, the quantity demanded falls, all else being equal.

Income Effect

Change in consumption resulting from a change in income.

Substitution Effect

Change in consumption patterns due to a change in the price of a good, making it more or less attractive compared to substitutes.

Normal Good

A good for which demand increases as consumer income rises.

Inferior Good

A good for which demand increases as consumer income falls.

Compliments

Two goods that are consumed together; an increase in the price of one leads to a decrease in the demand for the other.

Substitutes

Two goods that can replace each other; an increase in the price of one leads to an increase in demand for the other.

Elasticity

A measure of how much quantity demanded or supplied responds to changes in price.

Price Elasticity of Demand

The percent change in quantity demanded divided by the percent change in price.

Perfectly Elastic Demand

When demand responds infinitely to price changes; E = infinity.

Inelastic Demand

When the quantity demanded responds less than proportionately to price changes; E < 1.

Elastic Demand

When the quantity demanded responds more than proportionately to price changes; E > 1.

Unit Elastic Demand

When the percentage change in quantity demanded is equal to the percentage change in price; E = 1.

Total Revenue (TR)

The total amount of money received by firms from sales; calculated as price times quantity sold.

Income Elasticity of Demand

A measure of how much the quantity demanded of a good changes as consumer income changes.

Cross-Price Elasticity of Demand

A measure of how much the quantity demanded of one good changes in response to a price change in another good.

Consumer Surplus

The difference between what consumers are willing to pay for a good and what they actually pay.

Producer Surplus

The difference between the price at which producers are willing to sell a good and the market price.

Total Surplus

The sum of consumer surplus and producer surplus.

Deadweight Loss

The loss in total surplus that occurs when a market is not in equilibrium or produces inefficiently.

Price Ceiling

A maximum price set by the government, above which prices cannot rise; affects the market only if below equilibrium price.

Price Floor

A minimum price set by the government, below which prices cannot fall; affects the market only if above equilibrium price.

Tax Incidence

The distribution of tax burden between buyers and sellers.

Tariff

A government-imposed tax on imported goods.

Import Quota

A limit on the amount of a good that can be imported during a given time period.

Exporting

Selling goods to other countries, often resulting in benefits for domestic producers.

Importing

Buying goods from other countries, often benefiting domestic consumers.

Efficiency

Achieving maximum output from available resources with no waste.

Market Equilibrium

Occurs when quantity supplied equals quantity demanded.

Shortage

A situation where quantity demanded exceeds quantity supplied.

Surplus

A situation where quantity supplied exceeds quantity demanded.

Marginal Benefit (MB)

The additional benefit received from consuming one more unit of a good.

Marginal Cost (MC)

The additional cost incurred from producing one more unit of a good.

Willingness to Pay

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

Inefficiency

When resources are not used in the most productive way, leading to lost potential output.

Deadweight Loss

A loss of economic efficiency when equilibrium is not achieved.

Search Costs

The time and effort spent to find a good or service in the market.

Consumer Tax Burden

The portion of a tax that consumers ultimately pay, reflected in higher prices.

Producer Tax Burden

The portion of a tax that producers ultimately absorb, reflected in lower revenues.

Market Intervention

When the government intervenes in the market to control prices or quantity.

Supply Curve Shift

Occurs when a change in variables other than price affects supply.

Input Price Increase

Higher costs of production inputs leading to a decrease in supply.

Technological Advancement

Improved production methods leading to an increase in supply.

Future Expectations

Predictions about future market conditions that influence current supply and demand.

Number of Sellers

The quantity of firms in a market that affects supply levels.

Market Regulations

Rules established by the government to control the market behaviors.

Equilibrium Price

The price at which the quantity supplied equals the quantity demanded.

Demand Shifts

Changes in demand resulting from factors like income, tastes, and population.

Supply Shifts

Changes in supply due to factors such as input prices, technology, and number of sellers.

DWL Triangle

Illustrates the deadweight loss in a market caused by inefficiency.

Producer Price Support

Government actions to maintain prices above the market equilibrium.

Quota Rent

The economic rent received by a producer from restrictions on the supply.

Societal Benefits

Gains experienced by society as a whole through trade and efficient production.

Winners and Losers in Trade

The groups in society that benefit or lose from engaging in trade across borders.

Equilibrium Quantity

The quantity of goods that are bought and sold at the equilibrium price.

Specification

Specific details outlining the economic model or theory being discussed.

Inelastic Demand Curve

Shows quantity demanded changes little with price changes, illustrating necessity.

Elastic Demand Curve

Shows a significant change in quantity demanded with price changes, illustrating luxury.

Responsive Demand

Indicates that demand reacts significantly to changes in price.

Competitive Market Dynamics

Interactions within a market where many firms compete, affecting price and output.

Economic Resources

Factors of production used in creating goods and services.

Opportunity Cost in Output Variations

The cost incurred in not producing the next best alternative goods.

Fiscal Policy Impact

Effects that government spending and taxation have on the economy.

Monetary Policy influence

How central bank actions affect the economy, particularly regarding money supply.

Elastic Supply Curve

Indicates a significant change in quantity supplied with small price changes.

Investment in Capital Goods

Spending on items that will be used for future production.

Time Lag Effect

Delayed response in demand or supply to changes in market conditions.

Consumer Preferences

Shifts in what consumers want due to trends, advertising, or economic conditions.

Pricing Strategies

Methods firms use to set prices based on costs, competition, and market demand.

Market Structures

Various types of market organization (e.g., perfect competition, monopoly) that affect pricing.

Price Discrimination

The practice of charging different prices to different consumers for the same product.

Long-Term Economic Projections

Forecasts about the economy's future performance based on current trends.

Short-Term Fluctuations

Temporary changes in economic activity due to seasonal effects or short news events.