Econ Prelim 2

Relative price

The price of one good or service compared to another; reflects opportunity cost.

Allocation mechanism

The method by which scarce resources are distributed (e.g., market, government, tradition).

Traditional economic system

an economic system when decisions are made based on customs

Autocratic/command and control economic system

an economic system where decisions are made by a government or a bureaucracy or one individual

Market system

an economic system where decisions are made based on mutually beneficial and voluntary exchange

Perfect competition

a market structure where there are many buyers and sellers, a homogeneous product, perfect information, free entry and exit

Demand

the various quantities of a specific good consumers are willing and able to purchase at various prices

Law of demand

as the price of a good increases, the quantity demanded decreases

Supply

the various quantities of a specific good that producers are willing and able to sell at various prices

Alexander's law of supply

because per unit production cost increases as more output is produced, businesses need to receive a higher per unit price to get them to produce more output

Ceteris paribus

Latin for everything else held constant

Equilibrium

a situation from which there’s no tendency for change

Shortage /excess demand

when the quantity demanded is greater than the quantity supplied at the prevailing price

Surplus/ excess supply

when the quantity supplied is greater than the quantity demanded at the prevailing price

Substitute

goods used as alternatives to one another

Complement

goods used together as a package

Normal good

goods for which an increase in income leads to an increase in demand

Inferior goods

goods for which an increase in income leads to a decrease in demand

Expectations

perception about what the future holds

Price floor

a govt imposed min price, be effective must be set above the market price

Price ceiling

a govt imposed max price, be effective must be set below the market price

Momentary supply

the quantity supplied available at a specific time

Short run supply

the various quantities of a specific good producers are willing and able to sell in the short run

Long run supply

the various quantities of a specific good that producers are willing and able to sell in the long run

Quota

a government limit on the amount that can be produced, consumed and exchanged

Tax

a government policy that typically raises Pc, lowers Pp to curtail behavior and collect revenue

Subsidy

a govt policy that typically increases Pp, decreases Pc to promote behavior

Negative consumption externality

a bad thing that consumers are doing while consuming a product that affects others but is not taken into account by the market participant

Negative production externality

a bad thing that producers are doing while producing a product that affects others but is not taken into account by the market participant

Positive consumption fallacy

a good thing that consumers are doing while consuming a product that affects others but is not taken into account by the market participant

Positive production fallacy

a good thing that producers are doing while producing a product that affects others but is not taken into account by the market participant

Consumer's Burden from a Tax

the share of the government revenue from a tax that is due to the Pc increase

Producer's Burden from a Tax

the share the government receives from a tax that is due to the Pp decrease

Consumer’s Benefit from a Subsidy

the share of the government’s expenditures on a subsidy that is due to the Price of consumers (Pc) decrease

Producer’s Benefit from a Subsidy

the share of the government’s expenditures on a subsidy that is due to the Pp increase

Price elasticity of demand

measures the %Δ in the quantity demanded from a given %Δ in the price

Point Method

using the initial values as the point of reference for a percent change calculation

Arc Method (Mid point method)

using the average of the initial and end values as the point of reference for a percent change calculation

Elastic demand

when the percent change in Q is greater than the % change in P that induced it

Inelastic demand

when the % Δ in Q is less than the %Δ of P that induced it

Perfectly Elastic demand

when elasticity = -∞

Perfectly Inelastic Demand

when elasticity = 0

Unit elastic demand

when elasticity = -1

Total Revenue Income

P x Q

Income Elasticity

% Δ Q/ %ΔY(income): % change in demand for a given % change in income

Cross Price Elasticity

%Δ Qx/ %Δ Pz: % change in demand for 1 good to % change in demand for another good

Elasticity of Supply

%change in quantity supplied/ % change in price