Economics Exam 2 Review Notes

Comprehensive vocabulary flashcards covering microeconomic principles from the lecture notes, including tax incidence, price controls, international trade and protectionism, cost structures, and perfect competition profit maximization.

Tax Burden Principle (Elasticity)

The principle stating that the party with the steeper (less elastic) curve pays more of a tax; when supply is more elastic than demand, buyers pay more of the tax.

Tax Wedge

The gap created between the price paid by buyers and the price received by sellers as a result of a tax, where the buyer price lies above the seller price in the shaded area.

Price (Market Function)

A signal wrapped in an incentive that conveys important information about the economy and represents collective wisdom.

Futures Market

A financial market mechanism designed to reduce risk, contrasted with speculative markets which are very risky and where investors can easily lose more than they invested.

Price Ceiling

A government-imposed legal maximum price ($P_c$) that prevents prices from clearing the market, resulting in a shortage when set below equilibrium because $Q_D > Q_S$.

Non-Binding Price Ceiling

A price ceiling set above the market equilibrium price (such as a ceiling at $\$10$ when the equilibrium price is $\$8$), resulting in neither a shortage nor a surplus.

Rationing by Lines (Queues)

A non-price rationing mechanism under a shortage where goods are allocated to whoever is willing to wait in line the longest, making the true opportunity cost to consumers equal to the purchase price plus the value of time spent waiting.

Price Floor

A government policy specifying a legal minimum price support below which the price cannot fall, with the minimum wage serving as a primary example.

Means-Tested Policy

A policy approach (such as housing vouchers) where qualification and eligibility are directly tied to household income.

Price Taker

A seller (such as Farmer Jones selling corn) who has no individual influence on the market price and faces a perfectly elastic horizontal demand curve where marginal revenue equals price ($MR = P$).

GATT

The General Agreement on Tariffs and Trade; an international trade framework discussed alongside the World Trade Organization (WTO).

Quota Permit Allocation Methods

The three methods used by governments to distribute import quota rights: auctions, first-come first-served, and bribes.

Diffused Costs and Concentrated Benefits

A public choice explanation for why tariffs and quotas (such as sugar quotas) exist: per-person benefits are large for small interest groups, while per-person costs are small for large groups of consumers.

Rent-Seeking Behavior

A negative byproduct of protectionist trade policies wherein individuals and businesses expend resources trying to manipulate or get around trade regulations.

Industrial Policy

A protectionist approach where the government attempts to pick 'winners' and 'losers' by directing investments, restricting imports, and restricting foreign investments.

Total Revenue ($TR$)

The overall money received from sales, calculated by multiplying price by quantity: $TR = P \times Q$.

Marginal Revenue ($MR$)

The additional revenue generated from selling one additional unit of output, defined as $MR = \frac{\Delta TR}{\Delta Q}$.

Profit-Maximizing Rule

The operational condition where a firm maximizes total profit ($\pi$) by producing up to the exact output level where marginal revenue equals marginal cost ($MR = MC$).

Geometry of Average and Marginal Cost

The geometric relationship where $AC$ is falling whenever $MC < AC$, $AC$ is rising whenever $MC > AC$, and $MC$ crosses $AC$ precisely at the minimum point of $AC$.

Total Economic Profit ($\pi$)

The total earnings of a firm calculated as the per-unit profit margin multiplied by output: $\pi = (P - AC) \times Q$.

Long-Run Industry Equilibrium (Constant Cost Industry)

The stable market equilibrium where price settles at the minimum average cost ($P = P_1$) and economic profit for the typical firm is driven to zero ($\pi = 0$).