Microeconomics Midterm 2 Review

Practice vocabulary flashcards derived from Alex Kanode's Microeconomics Midterm 2 Review lecture notes, covering surplus, price controls, and elasticity.

Consumer Surplus

The area above the equilibrium price and below the demand curve.

Producer Surplus

The area above the supply curve and below the equilibrium price.

Total Surplus

The sum of consumer surplus and producer surplus ($CS + PS$).

Price Ceiling

A maximum price set on a good; it is only binding if it is set below the equilibrium price.

Price Floor

A minimum price set on a good; it is only binding if it is set above the equilibrium price.

Binding Price Ceiling

A government-imposed price limit positioned below the equilibrium price that always creates a shortage.

Binding Price Floor

A government-imposed price limit positioned above the equilibrium price that always creates a surplus.

Shortage

A market condition occurring when quantity demanded ($Qd$) is greater than quantity supplied ($Qs$).

Surplus (Price Floor context)

A market condition occurring when quantity supplied ($Qs$) is greater than quantity demanded ($Qd$).

Deadweight Loss

The loss of a government policy that is not offset by any other gain; it represents lost total surplus.

Shortage Market Responses

Quality cuts, long lines, misallocation of resources, and deadweight loss.

Surplus Market Responses

Wasteful increases in quality, misallocation of resources, and deadweight loss.

Elasticity

A measure of how much quantity demanded or supplied changes with a change in price, calculated using the equation $\text{Elasticity} = \frac{1}{\text{slope}} \times \frac{P}{Q}$.

Elastic

A condition where elasticity is greater than $1$, meaning quantity changes by a larger percentage than price.

Inelastic

A condition where elasticity is less than $1$, meaning quantity changes by a smaller percentage than price.

Unit Elastic

A condition where elasticity equals $1$, meaning quantity and price change by the same percentage.

Elasticity and Revenue (Elastic)

To increase revenue when demand is elastic, the price should be decreased.

Elasticity and Revenue (Inelastic)

To increase revenue when demand is inelastic, the price should be increased.

Factors increasing Demand Elasticity

More substitutes, more time, the good being less necessary, and the good representing a bigger portion of income.

Factors decreasing Supply Elasticity

More costly production and a bigger market size.

Perfectly Elastic

A state where quantity demanded changes by infinity if the price changes even by a small amount.

Perfectly Inelastic

A state where quantity demanded does not change regardless of how much the price changes.

Cross Price Elasticity

Measures the change in demand for one good relative to the change in price of another; positive values indicate substitutes and negative values indicate complements.

Income Elasticity

Measures the change in demand for a good relative to the change in income; positive values indicate normal goods and negative values indicate inferior goods.

Substitutes

Goods characterized by a positive cross price elasticity, where an increase in the price of one increases demand for the other.

Complements

Goods characterized by a negative cross price elasticity, where an increase in the price of one decreases demand for the other.

Normal Goods

Goods characterized by a positive income elasticity, where an increase in income increases demand.

Inferior Goods

Goods characterized by a negative income elasticity, where an increase in income decreases demand.