microeconomics final

market

a group of buyers and sellers of a particular good or service

competitive market

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

monopoly

only one seller in a market

quantity demanded

the amount of a good that buyers are willing and able to purchase

law of demand

the claim that. other things equal, the quantity demanded of a good falls when the price of the good rises

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

demand curve

a graph of the relationship between the price of a good and the quantity demandedma

market demand

the sum of all the individual demands for a particular good or service

normal good

a good for which, other things equal, an increase in income leads to an increase in demand

inferior good

a good for which, other things equal, an increase in income leads to a decrease in demand

substitutes

two good for which an increase in the price of one leads to an increase in the demand for the other

complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other

quantity supplied

the amount of a good that sellers are willing and able to sell

law of supply

that claim that, other things equal, the quantity supplied of a good rises when the price of the good rises

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

supply curve

a graph of the relationship between the price of a good and the quantity supplied

equailibrium

the market reaches a point where quantity supplied is equal to quantity demanded

equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

equilibrium price

the price that balances quantity supplied and quantity demanded

perfectly competitive market

so many buyers and sellers that no one can affect the market price —> each is a price taker

law of supply and demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of the good, computed as the percentage change in quantity demanded divided by the percentage change in price

price elasticity of demand (Formula)

percentage change in quantity demanded / percentage change in price

total revenue

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

income elasticity of demand (formula)

percentage change in quantity demanded / percentage change in income

income elasticity of demand

a measure of how much time the quantity demanded of a good responds to a change in consumers’ income, computed as the percentage change in quantity demanded divided by the percentage change in income

cross-price elasticity of demand (Formula)

percentage change in quantity demanded good 1 / percentage change in the price of good 2

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second 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, computed as the percentage change in quantity sipplied divided by the percentage change in price

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

who in the market will bear the burden of the tax

binding constraint

the ceiling is a binding constraint because the forces of supply and demand tend to move the price towards equilibrium price, but when the market price hits the ceiling, it can, by law, rise no further

willingness to pay

the maximum amoutn 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

efficienty

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

consumer surplus

value to buyers - amount paid by buyers

producer surplus

amount receieved by sellers - cost to sellers

total surplus

(value to buyers - amount paid by buyers) + (Amount received by sellers - cost to sellers)

equality

the property of distributing economic prosperity uniformly among the members of society

free markets

one without government intervention or regulation

market outcomes (free markets)

1. free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay

2. free markets allocate the demand for goods to the sellers who can produce them at the lowest cost

3. free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus

laissez faire

the policy of leaving well enough alone (not interfering)

market power

the ability to influence prices

allocate

to distribute for a particular purpose

deadweight loss

the fall in total surplus that results from a market distortion, such as a tax

underground economy

engaging in illegal economic activity, to evade taxes

world price

the price of a good that prevails in the world market for that good

tariff

a tax on goods produced abroad and sold domestically

import quota

a quantitative limit on imports of a good

externality

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

internalizing the externality

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

industrial policy

government intervention in the economy that aims to promote technology-enhancing industries

property right

the theoretical and legal ownership of resources and how they can be used

government responses to externalities

• command-and-control policies

  • market-based policies

command-and-control policies

regulate behavior directly

market-based policies

provide incentives so that private decision makers will choose to solve the problem on their own

corrective act

a tax 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 problem of externalities on their own

transaction costs

the coasts that parties incur in the process of agreeing toa nd following through on a bargain

excludable

a person can be prevented from using it (fish tacos and wireless internet access)

not excludable

people cant be prevented from using it (FM radio signals and national defense)

rival in consumption

one person’s use of it diminishes others’ use

rival good

can only be possesed or consumed by one person

not rival good

an MP3 file of someone’s latest single. — can be consumed over and over again

private good

excludable, rival in consumption (food)

public good

not excludable, not rival (national defense)

common resources

rival but not excludable (fish in the ocean)

natural monopolies

excludable but not rival (cable TV)

free rider

a person who receives the benefit of a good but avoids paying for it

cost-benefit analysis

a study that compares the costs and benefits of providing a public good

excludability

the property of a good whereby a person can be prevented from using it

rivalry in consumption

the property of a good whereby one person’s use diminishes other people’s use

tragedy of the commons

a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

ways to solve the tragedy

• privatization

• command and control

• taxing

marginal tax rate

the taxrate applied to each additional dollar of income

payroll tax

a tax on the wages that a firm pays its workers

corporation

a business that is set up as a seperate legal entity

excise taxes

are taxes on specific goods

transfer payments

a government payment not made in exchange for a good or service

budget deficit

an excess of government spending over government spending

average tax rate

the extra taxes paid on an additonal dollar of income

lump-sum tax

a tax that is the same amount for every person

benefits principle

the idea that people should pay taxes based on the benefits they receive from government services

ability-to-pay principle

the idea that taxes should be levied on a person according to how well that person can shoulder the burden

vertical equity

the idea that taxpayers with a greater ability to pay taxes, should pay larger amounts

horizontal equity

the idea that taxpayers with similar abilities to pay taxes should pay the same amount

proportional tax

a tax for which high income and low income taxpayers pay the same fraction of income

regressive tax

a tax for which high income taxpayers pay a smaller fraction of their income than do low income taxpayers

progressive tax

a tax for which high income taxpayers pay a larger fraction of their income than do low income taxpayers

market failure

fails to allocate resources efficiently

marginal benefit

the maximum amount a consumer is willing to pay for an additional good or service or the additional satisfaction experienced when purchasing

total revenue

the amount a firm receives for the sale of its output

total cost

the market value of the inputs a firm uses in production

profit

TR - TC

explicit costs

input costs that require an outlay of money by the firm (recorded in the books)

implicit costs

input costs that do not require an outlay of money by the firm (not recorded in the books)