AP MICROECONOMICS UNIT 2 VOCAB

Competitive Market

A market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold. 

Competitive Market Example

The market for blue jeans.

Law of demand

A higher price for a good or service, all other things being equal, leads people to demand a smaller quantity of that good or service.

Law of demand Example

The price of bunny-shaped Twinkies has gone from $2.50 per pack to $7.00 per pack, so people buy them less often.

Quantity Demand

The actual amount of a good or service consumers are willing and able to buy at some specific price. It is shown as a single point in a demand schedule or along a demand curve.

Quantity demand Example

When the price of neon pink fluffy pillows are $5.00 per pillow, people are willing and able to buy 3.

Change in demand

A shift of the demand curve, which changes the quantity demanded at any given price.

Change in demand Example

In 2020, consumers demanded more paper towels than 2019, and that lead to the shift of demand curve, changing the quantity demanded.

Substitutes

A rise in the price of one of the goods leads to a increase in the demand for the other good.

Substitutes Example

The price of jeans increased recently, so consumers have been purchasing more khaki pants instead.

Complements

A rise in the price of one of the goods leads to a decrease in the demand for the other good.

Complements Example

Recently, the price of gas has increase astronomically that the demand for cars has decreased.

Normal Goods

A rise in income increases the demand for a good.

Normal Goods Example

Celerita has come into contact with a lot of money and wants more Whole Food organic food.

Inferior goods

A rise in income decreases the demand for a good.

Inferior goods Example

Celerita has come into contact with alot of money and wants less Walmart food.

Law of Supply

Other things being equal, the price and quantity supplied of a good are positively related. 

Law of Supply Example

As the price of cotton increases from $10.00 to $15.00, the quantity farmers are willing to sell increases from 19 million to 25 million pounds.

Quantity supplied

The actual amount of a good or service people are willing to sell at some specific price.

Quantity supplied Example

Producers are offered $5 for every two pounds of cotton. 

Change in supply

A shift in the supply curve, which changes the quantity supplied at any given price.

Change in supply Example

In 2020, producers supplied more paper towels than 2019 because technology improved, and that led to the shift of supply curve, changing the quantity supplied.

Input

A good or service that is used to produce another good or service. 

Equilibrium

An economic situation where no individual would be better off doing something different; a competitive market is equilibrium when the price has moved to a level at which the quantity demanded of goods equals the quantity supplied with that good.

Equilibrium Example

When you are at Walmart checking out at the cashier and the line you're in is long, but the other line next to you is also long, you won't be better off switching lines.

Surplus

When the quantity supplied exceeds the quantity demanded; occurs when the price is above its equilibrium level.

Shortage

When the quantity demanded exceeds the quantity supplied; occurs when the price is below its equilibrium level.

Price Controls

Legal restrictions on how high or low a market price may go.

Price ceiling

A maximum price sellers are allowed to charge for a good or service.

Price ceiling Example

Price floor

A minimum price buyers are required to pay for a good or service.

Price Floor Example

Black market

Market in which goods or services are bought and sold illegally–either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling.

Black market Example

When employers pay employees under the table or through cash.

Quota

An upper limit on the quantity of some goods that can be bought or sold.

Quota Example

The government limits the amount of taxi rides that can be sold by limiting the number of taxis to only people who have medallions.

Deadweight loss

The value of forgone mutually beneficial transactions.

Deadweight loss Example

Rats LLC charges $5 for a good and face a $2 tax and instead of charging the customer $7 for the good, they charge $6 instead and take a $1 loss in order to maintain some of the demand.

Substitution Effect

A change in the price of a good is the change in the quantity of that good demanded as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive.

Substitution effect Example

When beef rises in price, quantity demanded of beef falls as people buy chicken which has become relatively cheaper as a substitute.

Income Effect

A change in the price of a good is the change in the quantity of that good demanded that results from a change in the consumers purchasing power when the price of the good changes.

Income effect Example

Richard buys a cheap cheese sandwich to eat for lunch at work, but occasionally splurges on a good hamburger, if the price of a cheese sandwich increases, it makes him feel like he cant afford to splurge on a hamburger as often because the higher price of the everyday cheese sandwich decreases their real income.

Elastic

When the price elasticity of demand or supply is greater than 1; the quantity demanded or supplied responds to price changes in a greater than proportional manner.

Elastic Example

You want a Tesla but do not need it.

Inelastic

When the price elasticity of demand or supply is less than 1; where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.

Inelastic Example

A person with diabetes needs insulin to survive.

Unit elastic

When the price elasticity of demand or supply is equal to exactly 1; the percentage change in price leads to an equal percentage change in quantity demanded or supplied.

Unit elastic Example

When Ricky sells 25 cat ears for $2.00 each, he makes $50.00, and when he sells five cat ears at $10.00, he still makes $50.00.

Perfectly elastic

When any price increase will cause the quantity demanded or supplied to drop to 0; the demand curve is a horizontal line.

Perfectly elastic Example

At $5.00, people will buy any quantity of pink paper but any price above $5.00, they would buy none.

Perfectly inelastic

If the price elasticity of demand is 0; when the quantity demanded or supplied does not respond at all to changes in the price, the demand curve is a vertical line.

Perfectly inelastic Example

The quantity of a kidney transplant demanded is always 10 million, regardless of the price.

Consumer surplus

The net gain received from purchasing a good or service; often used to refer to both individual consumer surplus and total consumer surplus.

Consumer surplus Example

Celerita may be willing to pay $40.00 for a stalk of celery, but the stalk of celery is only $20.00, so she gains $20.00.

Producer surplus

Represents the difference between the price a seller receives and their willingness to sell for each quantity.

Producer surplus Example

Rats LLC may be willing to sell their cheese for as low as $5.00 a pack, but they’re more then happy to sell them to Celerita for $10.00 a pack, so Rats LLC gain is $5.00.

Regressive tax

Rises less than in proportion to income; takes a larger percentage of income from low-income groups.

Regressive tax Example

A low income person is on a budget of $20.00 and buys an item that is $5.00 however, because of sales tax, the item becomes $5.25

Proportional tax

Rises in proportion to income; takes the same percentage of income from all income groups.

Proportional tax Example

A flat income tax of 10 percent on all income.

Progressive tax

Rises more than in proportion to income; takes a larger percentage of income from high-income groups.

Progressive tax Example

The federal income tax in which the wealthy pay more tax than the poor.

Excise tax

A tax on sales of a particular good or service.

Excise tax Example

A tax on the sale of cigarettes.

Tax Incidence

The distribution of the tax burden—or who pays what percent of the tax burden out of producers or consumers.

Tax incidence Example

Rats LLC pays 3% of the tac burden while the consumers pay 2.5%

Lump sum tax

A tax of a fixed amount paid by all taxpayers.

Lump-sum tax Example

Both Danny and Jamie pay the same $100 tax, even though Danny produces and earns significantly more than Jamie.

Utility

A measure of personal satisfaction.

Optimal consumption rule

In order to maximize utility, a consumer must equate the marginal utility per dollar spent on each good and service in the consumption bundle.