Econ 202: Principles of Microeconomics Exam 2 Study Guide

A collection of vocabulary terms and definitions related to microeconomics concepts essential for Exam 2.

Consumer Surplus

The difference between what consumers are willing to pay for a good and what they actually pay.

Producer Surplus

The difference between the amount producers are paid for a good and the minimum amount they would accept to produce it.

Market Efficiency

A market is efficient when the quantity of a good produced and consumed results in the highest possible total surplus.

Deadweight Loss

The loss in total surplus that occurs when a market is not operating at its efficient equilibrium, often due to taxes or regulations.

Externalities

Costs or benefits that affect third parties who did not choose to incur that cost or benefit.

Positive Externalities

Benefits that affect third parties positively, leading to underproduction of the good.

Negative Externalities

Costs that affect third parties negatively, leading to overproduction of the good.

Tax Incidence

The analysis of the effect of a particular tax on the distribution of economic welfare.

Corrective Taxes

Taxes designed to induce private decision-makers to take account of 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 externality problem on their own.

Market Failure

A situation in which the allocation of goods and services is not efficient, often through externalities or imperfect information.

Total Surplus

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

Supply Curve

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

Demand Curve

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

Tax Revenue

The income gained by the government through taxation.

Opportunity Cost

The value of the next best alternative that must be foregone when making a choice.

Price Controls

Government-mandated legal minimum or maximum prices set for specified goods.

Price Floor

A minimum price set by the government that is above the equilibrium price.

Price Ceiling

A maximum price set by the government that is below the equilibrium price.

Equilibrium Price

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

Willingness to Pay

The maximum amount that a buyer will pay for a good.

Tax Burden

The economic burden of a tax that is borne by consumers, producers, or both.

Marginal Buyer

The buyer whose willingness to pay is at the level of the market price.

Marginal Seller

The seller whose cost of production is at the level of the market price.

Subsidy

A government payment that supports a business or market.