ECON EXAM 2

Welfare Economics

Branch of economics that studies how the allocation of resources affects economic well-being.

Willingness to Pay / Reservation Price

Maximum price a consumer will pay for a good or service.

Consumer Surplus

Difference between the willingness to pay for a good (or service) and the price paid to get it.

Willingness to Sell

Minimum price a seller will accept to sell a good or service.

Producer Surplus

Difference between the willingness to sell a good or service and the price the seller receives.

Total Surplus / Social Welfare

Adding consumer and producer surplus.

Efficient

When an allocation of resources maximizes total surplus.

Equity

Fairness of the distribution of benefits among the members of a society.

Excise Taxes

Taxes levied on a particular good or service.

Incidence

The burden of taxation on the party who pays the tax through higher prices.

Deadweight Loss

Decrease in economic activity caused by market distortions, such as taxes.

Elasticity

A measure of the responsiveness of buyers and sellers to changes in price or income.

Elastic

Quantity demanded changes significantly as a result of a price change.

Inelastic

Quantity demanded changes a small amount as a result of a price change.

Immediate Run

No time for consumers to adjust their behavior to market price changes.

Short Run

Make decisions that reflect immediate or short-term wants, needs, or limitations.

Long Run

Make decisions that reflect needs, wants, and limitations over a long time horizon.

Determinants of Demand

Factors such as substitutes, budget share, necessities vs luxury goods, market definition, and time.

Income Elasticity of Demand (EI)

Measures how a change in income affects spending.

Cross-Price Elasticity of Demand (EC)

Measures the percentage change in the quantity demanded of one good to the percentage change in the price of a related good.

Total Revenue

Measure of the responsiveness of the quantity supplied to a change in price.

Price Elasticity of Supply

Measure of the responsiveness of the quantity supplied to a change in price.