Microeconomics: Trade, Decision-Making, Taxes, Elasticity, and Market Interventions

Comprehensive vocabulary flashcards covering the economic foundations of international trade, individual and firm decision-making, taxation and tax incidence, price and income elasticities, and government market interventions such as price controls and quotas.

Hyperglobalization

The phenomenon of extremely high levels of international trade.

Comparative Advantage

The advantage a country holds in producing a good or service if the opportunity cost of producing it is lower for that country than for other countries.

Ricardian Model of International Trade

An economic model of international trade that analyzes comparative advantage under the assumption of constant opportunity costs, causing production possibilities frontiers to be straight lines.

Autarky

A economic situation in which a nation does not engage in trade with other countries.

Factor Abundance

The supply of a factor of production relative to other factors available within a country.

Factor Intensity

A measure of the quantity of a specific factor of production used in comparison with other factors in the production of a good.

Heckscher-Ohlin Model

A trade model stating that a country has a comparative advantage in goods whose production is intensive in the factors of production that are abundant within that country.

Increasing Returns to Scale

A condition where productivity increases with the total quantity of output, often driving international trade by concentrating global production within a few large producers in select countries.

World Price

The price at which a good or service can be bought or sold abroad on international markets.

Trade Protection

Government policies that restrict or limit imports to protect domestic industries from foreign competition.

Tariff

A tax levied on imported goods and services.

Import Quota

A legal limit set by a government on the maximum quantity of a specific good that can be imported into a country.

Quota Rents

The financial earnings that accrue to quota license holders (usually foreign exporters) due to the artificial price increase created by an import quota.

Offshore Outsourcing

The practice of contracting with people or organizations in other nations to perform various operational or production tasks.

Explicit Cost

A cost that requires an actual outlay of money (such as tuition payments or wages paid).

Implicit Cost

A cost that does not require an outlay of money, measured by the dollar value of the benefits forgone.

Opportunity Cost

The total cost of an activity, calculated as: $\text{Opportunity cost} = \text{Total explicit cost} + \text{Total implicit cost}$.

Accounting Profit

The financial profit of a business, calculated as total revenue minus explicit costs ($\text{Accounting profit} = \text{Revenue} - \text{Explicit cost}$).

Economic Profit

Total revenue minus the opportunity cost of all resources used, calculated as: $\text{Economic profit} = \text{Revenue} - (\text{Explicit cost} + \text{Implicit cost})$.

Implicit Cost of Capital

The opportunity cost of using one's own capital, measured by the income that capital would have generated in its next-best alternative employment.

Principle of "Either-Or" Decision Making

The economic rule stating that when choosing between two alternative activities, an individual or firm should select the activity that yields positive economic profit.

Marginal Cost

The additional cost incurred by producing or doing one more unit of a good or service.

Marginal Benefit

The additional benefit derived from producing or doing one more unit of a good or service.

Optimal Quantity

The quantity of an activity or output that generates the maximum possible total profit.

Profit-Maximizing Principle of Marginal Analysis

The rule stating that the optimal quantity to produce is the largest quantity at which marginal benefit is greater than or equal to marginal cost ($MB \ge MC$).

Sunk Cost

A cost that has already been incurred and cannot be recovered, which should be ignored in future economic decisions.

Bounded Rationality

The decision-making approach of choosing a "good enough" option rather than the absolute best payoff because cognitive optimization is too costly.

Risk Aversion

The willingness to sacrifice some potential economic payoff in order to avoid an uncertain financial loss.

Mental Accounting

The habit of mentally assigning dollars to different accounts, creating the behavioral bias where some dollars are treated as worth more than others.

Loss Aversion

An oversensitivity to loss leading to an unwillingness to accept a loss and move on, where the pain of losing a dollar amount is felt roughly twice as strongly as the pleasure of gaining it.

Framing Bias

The psychological tendency to make decisions based on how choices and information are presented.

Status Quo Bias

The behavioral tendency to avoid making an active decision and instead default to an existing situation or choice.

Excise Tax

A tax charged on each unit of a good or service sold.

Tax Incidence

A measure of who really bears the financial burden of a tax, regardless of who is legally designated to pay it.

Deadweight Loss (of a Tax)

The lost total surplus resulting from a tax because it prevents mutually beneficial market transactions.

Administrative Costs (of a Tax)

The resources consumed in collecting a tax, preparing and processing tax payments, and attempting to evade or monitor tax compliance.

Benefits Principle

The principle of tax fairness stating that those who benefit from public spending should bear the tax burden that funds that spending.

Ability-to-Pay Principle

The principle of tax fairness stating that individuals with greater financial resources and income should pay higher taxes.

Tax Base

The economic measure (such as income, consumption, or property value) that determines the amount of tax an individual or firm must pay.

Progressive Tax

A tax structure that takes a higher percentage of income from high-income taxpayers than from low-income taxpayers.

Regressive Tax

A tax structure that takes a smaller percentage of income from high-income taxpayers than from low-income taxpayers.

Marginal Tax Rate

The percentage of an increase in personal or corporate income that is taxed away.

Tax Competition

The competitive pressure that limits state and local tax rates due to the risk that individuals or firms will relocate to lower-tax jurisdictions.

Price Elasticity of Demand

The ratio measuring price responsiveness, calculated as: $\text{Price elasticity of demand} = \frac{\%\text{ change in quantity demanded}}{\%\text{ change in price}}$.

Midpoint Method

A formula calculating percentage changes by dividing the change in a variable by its average: $\text{Average value of } X = \frac{\text{Starting value of } X + \text{Final value of } X}{2}$, and $\text{\% change in } X = \frac{\text{Change in } X}{\text{Average value of } X} \times 100$.

Inelastic Demand

A demand condition where the price elasticity of demand is less than 1, meaning an increase in price causes only a minor decrease in quantity demanded.

Elastic Demand

A demand condition where the price elasticity of demand is greater than 1, meaning an increase in price causes a large reduction in quantity demanded.

Unit-Elastic Demand

A demand condition where the price elasticity of demand equals exactly 1, meaning a percentage change in price generates an equal percentage change in quantity demanded.

Total Revenue

The total value of sales of a good or service, calculated as: $\text{Total revenue} = P \times Q$.

Price Effect

The effect of a price increase whereby each unit sold sells at a higher price, tending to increase total revenue.

Quantity Effect

The effect of a price increase whereby fewer units are sold, tending to decrease total revenue.

Cross-Price Elasticity of Demand

A measure of how quantity demanded of good A responds to a change in the price of good B, calculated as: $\text{Cross-price elasticity} = \frac{\%\text{ change in quantity of A demanded}}{\%\text{ change in price of B}}$.

Income Elasticity of Demand

A measure of how sensitive quantity demanded is to changes in consumer income: $\text{Income elasticity of demand} = \frac{\%\text{ change in quantity demanded}}{\%\text{ change in income}}$.

Normal Good

A good whose demand increases when income rises, characterized by a positive income elasticity of demand.

Inferior Good

A good whose demand decreases when income rises, characterized by a negative income elasticity of demand.

Price Elasticity of Supply

The measure of responsiveness of quantity supplied to price changes, calculated as: $\text{Price elasticity of supply} = \frac{\%\text{ change in quantity supplied}}{\%\text{ change in price}}$.

Perfectly Inelastic Supply

A supply condition where the price elasticity of supply is zero ($\text{Price elasticity of supply} = 0$), represented by a vertical supply curve where quantity supplied does not change with price.

Perfectly Elastic Supply

A supply condition where the price elasticity of supply is infinite ($\text{Price elasticity of supply} = \infty$), represented by a horizontal supply curve where producers supply any quantity at a single price but zero at any lower price.

Creative Destruction

Joseph Schumpeter's concept describing how innovative firms introduce technologies that challenge and displace incumbent firms and established market structures.

Rent Seeking

The act of expending resources to obtain wealth without contributing to societal wealth, typically by lobbying and manipulating political or regulatory systems.

Price Controls

Legal restrictions enforced by governments specifying how high or low a market price is allowed to go.

Price Ceiling

A legally mandated maximum price that sellers are allowed to charge for a good or service, typically set below market equilibrium.

Price Floor

A legally mandated minimum price that buyers are required to pay for a good or service, typically set above market equilibrium.

Black Market

A market in which goods and services are bought and sold illegally, either because the trade is prohibited or because prices exceed legal limits.

Quota (Quantity Control)

An upper limit set by a government on the total physical quantity of a good or service that can legally be transacted.

License

A legal right conferred by a government allowing the holder to supply or sell a regulated good or service.

Demand Price

The price of a given quantity at which consumers will demand that specific quantity.

Supply Price

The price of a given quantity at which producers will supply that specific quantity.

The Wedge (Quota Rent)

The difference between the demand price and the supply price at the legal quota limit, equal to the market value of the quota license.

What are the side effects of a price ceiling?

• Inefficiently low quantity

• Inefficient allocation to customers

• Wasted resources

• Inefficiently low quality

• Black markets

What are the side effects to a price floor?

• Deadweight loss

• Inefficient allocation of sales among sellers

• Waste of resources

• Inefficiently high quality

• Temptation to break the law

Quota Limit

The total amount of a good under a that can be legally transacted. (quota or quantity control)

If the demand is inelastic, will the price or quantity effect dominate?

The price effect will dominate the quantity effect. (Total Revenue will rise)

If the demand is elastic, will the price or quantity effect dominate?

The quantity effect will dominate the price effect. (Total revenue will fall)

If the demand is unit-elastic, will the price or quantity effect dominate?

Price effect = Quantity effect (Total Revenue doesn’t change)

Necessities

Goods that have its quantity demanded not changing a lot in a response to a change in price.

Luxuries

Goods that have its quantity demanded changing a lot in a response to a change in price.

What happens if there are fewer substitutes for a product/service?

Fewer substitutes makes it harder for consumers to adjust quantity when price changes, so demand is inelastic.

What happens if there are more substitutes for a product/service?

Many substitutes make it easier for consumers to switch brands when prices change, so demand is elastic.

If the products are substitutes, will cross price elasticity of demand be positive or negative?

Cross-price elasticity of demand is positive.

If the products are complements, will cross price elasticity of demand be positive or negative?

Cross-price elasticity of demand is negative.

National Security Argument

A country should protect domestic suppliers of crucial goods to be self-sufficient. Protection is required even during peacetime to ensure their availability.

The Four Reasons People May Choose a Worse Outcome (Rationally)

1. Concerns about fairness.

2. Nonmonetary rewards.

3. Bounded rationality.

4. Risk aversion.

The Seven Common Mistakes in Economic Decision Making

1. Misperceptions of opportunity costs

2. Overconfidence

3. Unrealistic expectations

4. Counting dollars unequally

5. Loss aversion

6. Framing bias

7. Status quo bias

When is an excise tax paid by (mainly) producers?

When the price elasticity of demand is high and the price elasticity of supply is low.

When is an excise tax paid by (mainly) consumers?

When the price elasticity of demand is low and the price elasticity of supply is high.