Economics 201 Practice Exam Vocabulary

Economics vocabulary and formulas derived from the Spring 2026 Practice Review 1, covering PPF, supply and demand, elasticity, surpluses, taxes, and price controls.

Production Possibilities Freedom (PPF)

A graph representing a country's production possibilities of two outputs given their resource inputs.

Opportunity Cost

The cost of increasing production of one good in terms of the amount of the other good that must be given up; in the US example, increasing military drone production from $20$ to $40$ thousand units required giving up $20$ million units of medical equipment.

Absolute Advantage

The capability to produce more of a specific good or service than competitors using the same amount of resources.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer; it determines the direction of production changes under free trade.

Feasible and Efficient Output

An output combination that lies exactly on the PPF curve, indicating all resources are fully and optimally utilized.

PPF Inward Shift

A reduction in production capacity caused by factors such as a catastrophic typhoon damaging production plants.

Inverse Supply Function

A mathematical representation of supply where price is a function of quantity, such as $P = 2 + \frac{Q_s}{50}$.

Midpoint Method (Price Elasticity of Supply)

A formula to calculate elasticity: $\varepsilon_S = \frac{\text{\%}\Delta Q_s}{\text{\%}\Delta P} = \frac{(Q_2-Q_1) / ((Q_2+Q_1)/2) \times 100\%}{(P_2-P_1) / ((P_2+P_1)/2) \times 100\%}$; in the beef market, this resulted in an elasticity of $1.4$.

Elastic Supply

A condition where the price elasticity of supply is greater than $1$, indicating quantity supplied is responsive to price changes.

Equilibrium Price ($P^*$)

The price at which quantity supplied equals quantity demanded ($Q_s = Q_d$); for the beef market, this was calculated as $10\,US\$/lb$.

Equilibrium Quantity ($Q^*$)

The specific amount of a good bought and sold when the market is in equilibrium; in the beef market example, this was $400\,\text{million lbs}$.

Consumer Surplus (CS)

The consumer's gains from trade when their willingness to pay exceeds the market price; calculated as $CS = \frac{1}{2} (50 - 10)(400) = \$8\,\text{billion}$ for the US beef market.

Producer Surplus (PS)

The producer's gains from trade when the market price exceeds their willingness to sell; calculated as $PS = \frac{1}{2} (10 - 2)(400) = \$1.6\,\text{billion}$ for the US beef market.

Tariff

A tax on imported goods that typically increases the price paid by domestic consumers and decreases the volume of imports.

Sales Tax

A tax added to a customer's bill that creates a wedge between the price the buyers pay ($P_{Buyer}$) and the price the sellers receive ($P_{Seller}$).

Deadweight Welfare Loss (DWL)

The loss in total surplus resulting from a market distortion, such as a tax or price ceiling, which reduces the quantity traded below the efficient equilibrium level; calculated as $DWL = \frac{1}{2} (\text{Tax})(Q^* - Q_{Tax})$.

Price Ceiling (Price Cap)

A legal maximum on the price at which a good or service can be sold, such as a $10\text{\%}$ cap on credit card interest rates.

Shortage

A market condition where quantity demanded exceeds quantity supplied, occurring when a price ceiling is set below the equilibrium price.