ECON 110 Midterm I

Market failure

When the market fails to allocate resources efficiently

Price controls

Government-imposed restrictions on prices

Price ceiling

Maximum price set by the government

Price floor

Minimum price set by the government

Deadweight loss

Loss of economic efficiency due to market inefficiency

Quota

Restriction on the quantity of a good that can be imported

License

Legal permission to engage in a particular activity

Demand price

Price at which consumers are willing to buy a good

Supply price

Price at which producers are willing to sell a good

Quota rent

Extra profit earned by those who hold licenses or quotas

Excise tax

Tax on the sale or production of a specific good

Incidence

Distribution of the burden of a tax between buyers and sellers

Tax rate

Percentage of income or the value of a good that is taxed

Administrative costs

Costs associated with implementing and enforcing a tax

Benefits principle

The idea that those who benefit from public spending should bear the burden of the tax that pays for that spending

Ability-to-pay principle

The idea that those with greater ability to pay taxes should pay more

Pareto efficiency

A situation where it is impossible to make someone better off without making someone else worse off

Lump-sum tax

A tax that is the same amount for every person

Equity/efficiency tradeoff

The tradeoff between fairness and economic efficiency

Tax base

The quantity or value of a good, service, or income that is subject to taxation

Tax structure

The way in which a tax is levied, such as progressive, proportional, or regressive

Proportional tax

A tax that takes the same percentage of income from all taxpayers

Progressive tax

A tax that takes a higher percentage of income from higher-income taxpayers

Marginal tax rate

The tax rate applied to the next dollar of income

External cost

A cost imposed on a third party as a result of an economic transaction

External benefit

A benefit received by a third party as a result of an economic transaction

Externalities

Costs or benefits that are not reflected in the market price of a good

Marginal social cost of pollution

The additional cost imposed on society as a result of pollution

Marginal social benefit of pollution

The additional benefit received by society as a result of pollution

Socially optimal quantity of pollution

The quantity of pollution that maximizes the overall welfare of society

Coase theorem

The idea that private parties can bargain and reach an efficient outcome in the presence of externalities

Internalizing the externality

Taking into account the costs or benefits of an externality in decision-making

Transaction costs

The costs associated with making an economic transaction

Environmental standards

Regulations that set limits on pollution or other environmental impacts

Emissions tax

A tax on the quantity of pollution emitted

Pigouvian tax

A tax designed to correct for the negative externalities of a particular activity

Tradable emissions permits

Permits that allow the holder to emit a certain quantity of pollution

Pigouvian subsidy

A subsidy designed to encourage activities that generate positive externalities

Individual choice

The decision-making process of an individual

Scarcity

The limited availability of resources to satisfy unlimited wants

Opportunity cost

The value of the next best alternative that is forgone when making a choice

Tradeoff

The sacrifice of one thing to obtain something else

Marginal decisions/analysis

Making decisions based on the additional benefits and costs of a choice

Incentive

Something that motivates or encourages a person to take a particular action

Positive statements

Statements that describe the world as it is

Normative statements

Statements that describe how the world should be

Causal relationship

A relationship between two variables where one variable causes a change in the other

Independent variable

A variable that is manipulated or changed in an experiment

Dependent variable

A variable that is measured or observed in an experiment

Competitive market

A market with many buyers and sellers, each having little influence on the market price

Supply and demand model

A model that explains the interaction between buyers and sellers in a market

Demand schedule

A table that shows the quantity of a good that buyers are willing and able to purchase at different prices

Quantity demanded

The quantity of a good that buyers are willing and able to purchase at a given price

Demand curve

A graphical representation of the relationship between the price of a good and the quantity demanded

Law of demand

The inverse relationship between the price of a good and the quantity demanded

Shift of vs. movement along the demand curve

A shift of the demand curve represents a change in demand, while a movement along the demand curve represents a change in quantity demanded

Shifters of demand

Factors that can cause the demand curve to shift, such as income, prices of related goods, tastes and preferences, and expectations

Substitutes

Goods that can be used in place of each other

Complements

Goods that are used together

Normal good

A good for which demand increases as income increases

Inferior good

A good for which demand decreases as income increases

Supply schedule

A table that shows the quantity of a good that sellers are willing and able to sell at different prices

Quantity supplied

The quantity of a good that sellers are willing and able to sell at a given price

Supply curve

A graphical representation of the relationship between the price of a good and the quantity supplied

Shift of vs. movement along the supply curve

A shift of the supply curve represents a change in supply, while a movement along the supply curve represents a change in quantity supplied

Shifters of supply

Factors that can cause the supply curve to shift, such as input prices, technology, expectations, and number of sellers

Input

A resource used in the production of goods and services

Equilibrium price & quantity

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

Surplus

A situation in which the quantity supplied exceeds the quantity demanded

Shortage

A situation in which the quantity demanded exceeds the quantity supplied

Price elasticity of demand & supply

A measure of the responsiveness of quantity demanded or supplied to a change in price

Perfectly elastic demand & supply

A situation where a small change in price leads to an infinitely large change in quantity demanded or supplied

Perfectly inelastic demand & supply

A situation where a change in price has no effect on the quantity demanded or supplied

Elastic vs. inelastic vs. unit-elastic demand & supply

Elastic demand or supply is when the quantity demanded or supplied is very responsive to changes in price, inelastic demand or supply is when the quantity demanded or supplied is not very responsive to changes in price, and unit-elastic demand or supply is when the percentage change in quantity demanded or supplied is equal to the percentage change in price

Total revenue

The total amount of money received by sellers from the sale of a good

Cross-price elasticity of demand

A measure of the responsiveness of the quantity demanded of one good to a change in the price of another good

Income elasticity of demand

A measure of the responsiveness of the quantity demanded to a change in income

Willingness to pay

The maximum price that a buyer is willing to pay for a good

Individual consumer surplus

The difference between the willingness to pay and the price paid by an individual buyer

Total consumer surplus

The sum of the individual consumer surpluses of all buyers in a market

Cost

The value of resources used to produce a good or service

Individual producer surplus

The difference between the price received and the cost of production for an individual seller

Total producer surplus

The sum of the individual producer surpluses of all sellers in a market

Property rights

The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it

Economic signals

Information that helps individuals or firms make decisions about buying or selling goods and services

Inefficient

A situation in which resources are not being used to their maximum potential

Economics

The study of how individuals and societies allocate scarce resources to satisfy unlimited wants

Neoclassical economics

A school of thought that emphasizes the role of individual choice and markets in allocating resources

Classical economics

A school of thought that emphasizes the role of markets and self-interest in allocating resources

Labor theory of value

The idea that the value of a good is determined by the amount of labor required to produce it

Surplus value

The difference between the value of a worker's labor and the wages they are paid

Marxist economics

A school of thought that emphasizes the role of class struggle and the exploitation of labor in capitalist societies

Capitalism

An economic system based on private ownership of the means of production and the pursuit of profit

Justice

The concept of fairness in the distribution of resources and opportunities

Model

A simplified representation of reality used to understand and analyze complex economic phenomena

Resource

Anything that can be used to produce goods and services

Malthus' law of population

The idea that population growth will outpace the growth of resources, leading to poverty and misery

The five capitals

The five types of resources: natural, human, social, manufactured, and financial capital

Power

The ability to influence or control the behavior of others

Commodification of natural resources

The process of turning natural resources into commodities that can be bought and sold