ECON 201 - Exam # 2 - Drexel University - Pia DiGirolamo

Elasticity

A measure of how much the quantity demanded of a good responds to a change in consumers' income

Price Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good

Elastic

When the quantity demanded or supplied responds substantially to a change in one of its determinants

Inelastic

When the quantity demanded or supplied responds only slightly to a change in one of its determinants

Total Revenue

The amount paid by buyers and received by sellers of a good computed as P × Q

Income Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in consumers' income

Cross-Price Elasticity

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

Price Elasticity of Supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good

Normal Good

A good characterized by a positive income elasticity

Inferior Good

A good characterized by a negative income elasticity

Price Ceiling

A legal maximum on the price at which a good can be sold

Price Floor

A legal minimum on the price at which a good can be sold

Tax Incidence

The manner in which the burden of a tax is shared among participants in a market

Tax Wedge

The difference between what the buyer pays and the seller receives after a tax has been imposed (or is placed in a market)

Welfare Economics

The study of how the allocation of resources affects economic well-being

Willingness to Pay

The maximum amount that a buyer will pay for a good

Consumer Surplus

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Cost

The value of everything a seller must give up to produce a good

Producer Surplus

The amount a seller is paid for a good minus the seller's cost of providing it

Efficiency

The property of a resource allocation of maximizing the total surplus received by all members of society

Equality

The property of distributing prosperity uniformly among the members of society

Market Failure

The inability of some unregulated markets to allocate resources efficiently

Deadweight Loss (DWL)

The inability of some unregulated markets to allocate resources efficiently

Laffer Curve

A graph showing the relationship between the size of a tax and the tax revenue collected

Internalizing the Externality

altering incentives so that people take into account the external effects of their actions

Externality

the uncompensated impact of one person's actions on the well-being of a bystander

Corrective Tax

a tax designed to induce private decision makers to take into account the social costs that arise from a negative externality

Coase Theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Transaction Costs

the costs that parties incur during the process of agreeing to and following through on a bargain