Economics: Chapters 4, 5, 6, 9, and 10 Comprehensive Vocabulary

Comprehensive practice vocabulary flashcards covering elasticity, market efficiency, government intervention, consumer choice theory, and short-run production costs.

Price Elasticity of Demand

A units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same, calculated as $\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}$.

Inelastic Demand

A demand case in which the percentage change in the quantity demanded is less than the percentage change in the price, resulting in a price elasticity of demand between zero and $1$.

Elastic Demand

A demand case in which the percentage change in the quantity demanded exceeds the percentage change in price, resulting in a price elasticity of demand greater than $1$.

Unit Elastic Demand

A demand relationship in which the percentage change in the quantity demanded equals the percentage change in the price, resulting in a price elasticity of demand equal to $1$.

Perfectly Inelastic Demand

A demand condition where the quantity demanded remains constant regardless of price changes, yielding a price elasticity of demand equal to zero and a vertical demand curve.

Perfectly Elastic Demand

A demand condition where the quantity demanded changes by an infinitely large percentage in response to a tiny price change, yielding a price elasticity of demand equal to infinity ($\infty$) and a horizontal demand curve.

Total Revenue Test

A method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity sold remain the same.

Income Elasticity of Demand

A measure of the responsiveness of the demand for a good or service to a change in income, other things remaining the same, calculated as $\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in income}}$.

Cross Elasticity of Demand

A measure of the responsiveness of the demand for a good to a change in the price of a substitute or complement, other things remaining the same, calculated as $\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price of a substitute or complement}}$.

Elasticity of Supply

A measure of the responsiveness of the quantity supplied of a good to a change in its price when all other influences on selling plans remain the same, calculated as $\frac{\text{Percentage change in quantity supplied}}{\text{Percentage change in price}}$.

Momentary Supply

The response of the quantity supplied of a good to a price change at the immediate instant that the price changes.

Command System

A resource allocation method that allocates resources by the order or command of someone in authority.

Marginal Social Benefit (MSB)

The marginal benefit to the entire society from consuming one additional unit of a good or service, represented graphically by the market demand curve.

Consumer Surplus

The excess of the benefit received from a good over the amount paid for it, calculated as the marginal benefit (or value) of a good minus its price, summed over the quantity bought.

Marginal Social Cost (MSC)

The marginal cost to the entire society of producing one additional unit of a good or service, represented graphically by the market supply curve.

Producer Surplus

The excess of the amount received from the sale of a good or service over the cost of producing it, calculated as the price received minus the marginal cost (or minimum supply-price), summed over the quantity sold.

Total Surplus

The sum of consumer surplus and producer surplus in a market.

Deadweight Loss

The decrease in total surplus that results from an inefficient level of production, whether through underproduction or overproduction.

Market Failure

A situation in which a market delivers an inefficient outcome, characterized by either underproduction or overproduction of an item.

Transactions Costs

The costs of the services that enable a market to bring buyers and sellers together to complete an exchange.

Utilitarianism

A nineteenth-century principle developed by thinkers such as Jeremy Bentham and John Stuart Mill stating that society should strive to achieve 'the greatest happiness for the greatest number,' arguing that efficiency requires complete income equality.

Big Tradeoff

A tradeoff between efficiency and fairness that arises because taxing high incomes to transfer wealth reduces the incentives to work and save, shrinking the size of the total economic pie.

Symmetry Principle

The requirement that people in similar situations be treated similarly, which in economic life translates into equality of opportunity.

Price Ceiling

A government regulation that makes it illegal to charge a price higher than a specified level, also referred to as a price cap.

Rent Ceiling

A price ceiling applied specifically to a housing market that sets the maximum legal rent that landlords may charge.

Search Activity

The time and resources spent looking for someone with whom to do business, which increases when shortages arise due to price regulations.

Price Floor

A government regulation that makes it illegal to charge a price lower than a specified level.

Minimum Wage

A price floor applied to a labour market that establishes the lowest wage rate at which firms are legally allowed to hire workers.

Tax Incidence

The division of the burden of a tax between buyers and sellers in a market.

Benefits Principle

The tax fairness proposition that people should pay taxes equal to the benefits they receive from the services provided by the government.

Ability-to-Pay Principle

The tax fairness proposition that people should pay taxes according to how easily they can bear the economic burden of the tax.

Production Quota

An upper limit to the quantity of a good that may legally be produced in a specified period.

Subsidy

A payment made by the government to a producer, functioning like a negative tax by lowering the price paid by buyers and increasing the quantity produced.

Budget Line

The boundary marking the limits of a household's consumption choices, separating what is affordable from what is unaffordable given income and prices.

Real Income

A household's income expressed as the quantity of goods that the household can afford to buy, equal to money income divided by the price of a good ($Y/P$).

Relative Price

The price of one good divided by the price of another good, equal to the opportunity cost of the good and the magnitude of the slope of the budget line.

Indifference Curve

A curve that shows combinations of goods among which a consumer is indifferent.

Marginal Rate of Substitution (MRS)

The rate at which a person will give up good $y$ to get an additional unit of good $x$ while remaining indifferent, measured by the magnitude of the slope of an indifference curve.

Diminishing Marginal Rate of Substitution

A general tendency for a person to be willing to give up less of good $y$ to get one more unit of good $x$, while at the same time remaining indifferent as the quantity of $x$ increases.

Price Effect

The effect of a change in the price of a good on the quantity of the good consumed.

Substitution Effect

The effect of a change in price on the quantity bought when the consumer hypothetically remains indifferent between the original choice and the new choice.

Income Effect

The effect of a change in income on buying plans and consumption, with relative prices held constant.

Total Product

The maximum output that a given quantity of labour can produce with a given quantity of fixed factors.

Marginal Product of Labour

The increase in total product that results from a one-unit increase in the quantity of labour employed, with all other inputs remaining the same.

Average Product of Labour

Total product divided by the quantity of labour employed, indicating how productive workers are on average.

Law of Diminishing Returns

The economic principle that as a firm uses more of a variable factor of production with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes.

Total Fixed Cost (TFC)

The cost of a firm's fixed factors of production, which does not change when output changes.

Total Variable Cost (TVC)

The cost of a firm's variable factors of production, which changes as output changes.

Marginal Cost (MC)

The increase in total cost that results from a one-unit increase in output, calculated as $\frac{\Delta TC}{\Delta Q}$.

Average Total Cost (ATC)

Total cost per unit of output, calculated as total cost divided by output ($TC/Q$) or the sum of average fixed cost and average variable cost ($AFC + AVC$).

Production Function

The relationship between the maximum output attainable and the quantities of both labour and capital.