Microeconomics: Elasticity, Government Intervention, Market Efficiency, and Trade

Comprehensive vocabulary flashcards covering elasticity, taxes, price controls, quantity regulations, welfare economics, comparative advantage, and international trade.

Price Elasticity of Demand

A measure of how responsive buyers are to price changes, calculated as $\frac{\%\Delta Q}{\%\Delta P}$, representing the percentage change in quantity demanded resulting from a $1\%$ change in price.

Elastic Demand

A condition where the absolute value of the percentage change in quantity demanded is larger than the absolute value of the percentage change in price, yielding an elasticity magnitude greater than $1$ ($|\text{Price Elasticity of Demand}| > 1$).

Inelastic Demand

A condition where the absolute value of the percentage change in quantity demanded is smaller than the absolute value of the percentage change in price, yielding an elasticity magnitude less than $1$ ($|\text{Price Elasticity of Demand}| < 1$).

Perfectly Elastic Demand

An extreme condition where any change in price leads to an infinitely large change in quantity demanded ($|\text{Price Elasticity of Demand}| = \infty$), represented graphically by a horizontal demand curve.

Perfectly Inelastic Demand

An extreme condition where quantity demanded does not respond at all to price changes ($|\text{Price Elasticity of Demand}| = 0$), represented graphically by a vertical demand curve.

Midpoint Formula

A formula used to calculate consistent percentage changes by dividing the change between two points by the average of those two points: $\frac{X_2 - X_1}{(X_2 + X_1)/2} \times 100$.

Total Revenue

The total monetary amount received by sellers from buyers, calculated as price multiplied by quantity ($\text{Price} \times \text{Quantity}$).

Cross-Price Elasticity of Demand

A measure of how responsive the demand for one good is to price changes of another good, calculated as the percentage change in the quantity demanded of good X divided by the percentage change in the price of good Y.

Substitute Goods (in Cross-Price Elasticity)

Goods that can replace one another; an increase in the price of one good leads to an increase in demand for the other, yielding a positive cross-price elasticity of demand.

Complementary Goods (in Cross-Price Elasticity)

Goods that are consumed together; an increase in the price of one good leads to a decrease in demand for the other, yielding a negative cross-price elasticity of demand.

Income Elasticity of Demand

A measure of how responsive the demand for a good is to changes in consumer income, calculated as the percentage change in quantity demanded divided by the percentage change in income.

Normal Good

A good for which demand increases when consumer income rises and decreases when income falls, indicated by a positive income elasticity of demand.

Inferior Good

A good for which demand decreases when consumer income rises and increases when income falls, indicated by a negative income elasticity of demand.

Price Elasticity of Supply

A measure of how responsive sellers are to price changes, calculated as the percentage change in quantity supplied divided by the percentage change in price ($\frac{\%\Delta Q_{\text{supplied}}}{\%\Delta P}$).

Elastic Supply

A condition where suppliers can increase the quantity supplied substantially in response to price changes, yielding a price elasticity of supply value greater than $1$ ($\frac{\%\Delta Q}{\%\Delta P} > 1$).

Inelastic Supply

A condition where suppliers cannot substantially adjust quantity supplied in response to price changes, yielding a price elasticity of supply value less than $1$ ($\frac{\%\Delta Q}{\%\Delta P} < 1$).

Statutory Burden

The legal obligation assigned by government policy specifying whether buyers or sellers are required to remit a tax payment.

Economic Burden

The actual financial burden created by changes in after-tax prices faced by buyers and sellers as a result of a tax policy.

Tax Incidence

The division of the economic burden of a tax between buyers and sellers, which is determined by the relative price elasticities of supply and demand rather than by statutory burden.

Subsidy

A government financial payment made to individuals or firms who make a specific choice; it operates analytically as a negative tax by lowering the price to buyers and raising the price received by sellers.

Price Ceiling

A legally mandated maximum price that sellers are permitted to charge for a good or service.

Binding Price Ceiling

A price ceiling set below the equilibrium price, which prevents the market from reaching equilibrium and results in a shortage.

Price Floor

A legally mandated minimum price that sellers can charge for a good or service.

Binding Price Floor

A price floor set above the equilibrium price, which prevents the market from reaching equilibrium and results in a surplus.

Quantity Regulation

A government regulation that specifies a minimum or maximum legal quantity of a good or service that can be bought or sold.

Mandate

A government requirement to buy or sell a minimum quantity of a good; it is binding when set at a quantity greater than the market equilibrium quantity.

Quota

A government-imposed upper limit on the maximum quantity of a good that can be bought or sold; it is binding when set at a quantity less than the market equilibrium quantity.

Positive Analysis

Objective economic analysis that describes what is happening, explains why it is happening, or forecasts what will happen without incorporating value judgments.

Normative Analysis

Prescriptive economic analysis that evaluates what should happen or what policy should be adopted, fundamentally relying on subjective value judgments.

Economic Efficiency

A standard for evaluating policies where an outcome is considered more economically efficient if it generates a larger total economic surplus.

Efficiency Outcome

The specific market outcome that yields the largest possible economic surplus, maximizing the overall size of the economic pie.

Equity

A criterion of fairness evaluating how economic benefits and surplus are distributed across members of society.

Consumer Surplus

The economic surplus gained from purchasing a good, calculated as marginal benefit minus price ($\text{Consumer Surplus} = \text{Marginal Benefit} - \text{Price}$).

Producer Surplus

The economic surplus gained from selling a good, calculated as price minus marginal cost ($\text{Producer Surplus} = \text{Price} - \text{Marginal Cost}$).

Voluntary Exchange

A market transaction occurring only when both buyers and sellers agree to trade freely, ensuring that neither party is made worse off and that both gain surplus.

Economic Surplus

The sum of consumer surplus and producer surplus in a market, which equals total marginal benefits minus total marginal costs ($\text{Economic Surplus} = \text{Marginal Benefit} - \text{Marginal Cost}$).

Efficient Production

Producing a given quantity of output at the lowest possible cost by ensuring each unit is produced by the supplier with the lowest marginal cost.

Efficient Allocation

Distributing goods such that each unit goes to the consumer who derives the highest marginal benefit from it, maximizing economic surplus.

Efficient Quantity

The market quantity where marginal benefit equals marginal cost, thereby generating the maximum possible economic surplus.

Market Failure

A situation where unregulated market forces of supply and demand lead to an inefficient economic outcome.

Market Power

The ability of a firm to raise prices above competitive levels due to limited competition, causing underproduction relative to the efficient quantity.

Externalities

Side effects imposed on third parties not directly involved in a transaction; unaddressed negative externalities lead to overproduction relative to the efficient level.

Private Information

Information that one party in an economic exchange possesses while the other does not, which can erode trust and cause underproduction.

Deadweight Loss (DWL)

The reduction in total economic surplus when the actual quantity traded differs from the efficient quantity, calculated as $\text{Economic Surplus at Efficient Quantity} - \text{Actual Economic Surplus}$.

Government Failure

A situation where government policy interventions lead to worse economic outcomes than the market failures they sought to resolve.

Gains from Trade

The economic benefits and increased surplus that result from reallocating resources, goods, and services to better uses.

Comparative Advantage

The ability of an individual, firm, or country to complete a task or produce a good at a lower opportunity cost than someone else.

Absolute Advantage

The ability of an economic agent to complete a task or produce a good using fewer inputs (or produce more output with the same inputs) than another.

Opportunity Cost of a Task

The amount of an alternative output given up to perform a specific activity, measured as $\frac{\text{Time this task takes}}{\text{Time required to produce the alternative}}$.

Specialization

The practice of focusing economic effort on the specific tasks or goods in which one holds a comparative advantage to minimize opportunity costs.

Price as a Signal

The role of price in conveying information to potential sellers about buyers' marginal benefits and to potential buyers about sellers' marginal costs.

Price as an Incentive

The function of prices in motivating market participants to alter their behavior, encouraging sellers to produce more when prices are high and buyers to purchase less.

Prediction Markets

Specially designed markets where trading contracts with payoffs tied to the occurrence of uncertain future events aggregate dispersed private information into price probabilities.

Internal Markets

Price-based allocation mechanisms established inside an organization or firm to allocate scarce internal resources without centralized command.

Knowledge Problem

The limitation arising when the critical dispersed information required to make optimal resource allocations is unavailable to a centralized decision-maker.

Import

A good or service purchased by domestic buyers from foreign sellers.

Export

A good or service sold by domestic producers to foreign buyers.

Trade Costs

The extra expenses incurred as a consequence of conducting commerce internationally rather than domestically, including shipping, tariffs, language differences, and legal compliance.

Learning by Doing

The progressive reduction of unit production costs that occurs when workers and firms discover efficiencies through long-term practice on a specific product.

World Supply

The total aggregate quantity of a good supplied by all producers across the entire globe at each given price.

World Demand

The total aggregate quantity of a good demanded by all buyers worldwide at each given price.

World Price

The equilibrium market clearing price established in global markets where world supply equals world demand.

Dumping

An unfair trade practice where foreign firms temporarily sell goods below cost or home market prices to drive domestic producers out of business, aiming to raise prices later.

Tariff

A tax levied by a government on imported foreign products, raising domestic prices and generating government revenue.

Red Tape

Complex administrative and bureaucratic regulations (such as excessive documentation and inspection requirements) that raise trade costs without raising public revenue.

Globalization

The accelerating economic, political, and cultural integration among countries across the world, primarily spurred by declining trade costs.