AP ECON TEST 2

Substitution Effect

the change in the quantity of a good demanded as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive

Income Effect

the change in the quantity of a good demanded that results from a change in the consumers purchasing power when the price of the good changes

Price Elasticity of Demand

the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve (dropping the minus sign)

Midpoint Method

a technique for calculating the percent change; calculated in a variable compared with the average, or midpoint, of the initial and final values

Perfectly inelastic

demand is this when the quantity demanded does not respond at all to the changes in price; when demand is perfectly inelastic, the demand curve is a vertical line

Perfectly elastic

demand is this when any price increase will cause the quantity demanded to drop to zero; when demand is perfectly elastic, the demand curve is a horizontal line

Elastic

demand is this if the price elasticity of demand is greater than 1

Inelastic

demand is this if the price elasticity of demand is less than 1

Unti-elastic

demand is this if the price elasticity of demand is exactly 1

Total revenue

the total value of sales of a good or service; it is equal to the price multiplied by the quantity sold

Cross-price elasticity of demand

measures the effect of the change in one good's price on the quantity demanded of the other good; equal to the percent change in the quantity demanded of one good divided by the percent change in the other good's price

Income elasticity of demand

the percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in the consumer's income

Income-elastic demand

the income elasticity of demand is greater than 1

Income-inelastic demand

the income elasticity of demand is positive, but less than 1

Price elasticity of supply

a measure of the responsiveness of the quantity of a good supplied to the price of that good; the ratio of the percent change in the quantity supplied to the percent change in the price as you move along the supply curve

Perfectly inelastic supply

the price elasticity of supply is zero; vertical line

Perfectly elastic supply

the quantity supplied is zero below some price and infinite above that price; horizontal line

Quota

An upper limit on the quantity of some good that can be bought or sold

License

Gives its owner the right to supply a good or service

Demand Price

The price at which consumers will demand a specific quantity of a good or service

Supply Price

The price at which producers will supply a specific quantity of a good or service

Wedge

The effect of a quota (or excise tax). It is the "gap" that exists between the price paid by consumers and the price received by producers.

Quota Rent

The difference between the demand price and the supply price at the quota

Value of the Quota Rent

Equal to the market price of the license when the license is traded

Deadweight Loss

The lost gains to producers and consumers associated with transactions that do not occur due to market interventions (such as quotas, price controls, or excise taxes)

Price Controls

Legal restrictions on how high or low a market price may go

Price Ceiling

a maximum price sellers are allowed to charge for a good or service

Price floor

A minimum price buyers are required to pay for a good or service

Inefficient allocation to consumers

caused by Price ceilings: those who want the good and are willing to pay a lot dont get it and those who could care less get it.

Wasted Resources

caused by Price Ceilings: people spend resources to cope with shortages caused by the price ceiling

Inefficiently Low quality

caused by Price Ceilings: sellers offer low quality goods at a low price even though buyers would prefer a higher quality at a higher price

Black Market

Caused by Gov restrictions. things are sold illegally to avoid Gov taxes or restrictions

Minimum Wage

a Price floor for labor

Inefficient allocation of sales among sellers

Caused by Price Floors: those would would be willing to sell the good at the lowest price are not always those who manage to sell it

Inefficiently High Quality

caused by Price Floors: sellers offer high quality goods at a high price, even though buyers would prefer a lower quality at a lower price.

Quantity Supplied

the actual amount of a good or service producers are willing to sell at some specific price

Supply Schedule

shows how much of a good or service producers will supply at different prices

Supply Curve

shows the relationship between quantity supplied and price

Law of Supply

(other things equal) the price and quantity supplied of a good are positively related

Change in Supply

a shift of the supply curve, which changes the quantity supplied at any given price

Movement Along the Supply Curve

a change in the quantity supplied of a good that is the result of a change in that good's price

Input

anything that is used to produce a good or a service

Individual Supply Curve

illustrates the relationship between quantity supplied and price for an individual producer

Equilibrium

when no individual would be better off doing something different

Equilibrium Price (Market-Clearing Price)

the price where the quantity demanded of a good equals the quantity supplied of that good

Equilibrium Quantity

the quantity of the good bought and sold at the equilibrium price

Surplus

when the quantity supplied exceeds the quantity demanded; occurs when the price is above its equilibrium level

Shortage

when the quantity demanded exceeds the quantity supplied; occurs when the price is below its equilibrium level

change in demand

a shift of the demand curve, which changes the quantity demanded at any given price. (p. 52)

competitive market

a market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold. (p. 49)

complements

two goods (often consumed together) for which a rise in the price of one of the goods leads to a decrease in the demand for the other good. (p. 54)

demand curve

a graphical representation of the demand schedule. It shows the relationship between quantity demanded and price. (p. 51)

demand schedule

shows how much of a good or service consumers will be willing and able to buy at different prices. (p. 50)

individual demand curve

illustrates the relationship between quantity demanded and price for an individual consumer. (p. 56)

inferior good

when a rise in income decreases the demand for a good; usually considered less desirable than more expensive alternatives. (p. 55)

law of demand

the "law" that a higher price for a good or service, other things being equal, leads people to demand a smaller quantity of that good or service. (p. 51)

movement along the demand curve

a change in the quantity demanded of a good that is the result of a change in that good's price. (p. 52)

normal good

when a rise in income increases the demand for a good; most goods are normal goods. (p. 55)

quantity demanded

the actual amount of a good or service consumers are willing and able to buy at some specific price. (p. 50)

substitutes

two goods for which a rise in the price of one of the goods leads to an increase in the demand for the other good. (p. 54)

supply and demand model

a model of how a competitive market works. (p. 50)

consumer surplus

the net gain received from purchasing a good or service.

cost

the lowest price at which a seller is willing to sell a good.

individual consumer surplus

the net gain to an individual buyer from the purchase of a good; is equal to the difference between the buyer's willingness to pay and the price paid.

individual producer surplus

the net gain to an individual seller from selling a good; is equal to the difference between the price received and the seller's cost.

producer surplus

refers to both individual and total producer surplus.

total consumer surplus

the sum of the individual consumer surpluses of all the buyers of a good in a market.

total producer surplus

the sum of the individual producer surpluses of all the sellers of a good in a market.

willingness to pay

the maximum price at which a consumer would buy a good.

administrative costs

(of a tax) the resources used by the government to collect the tax, and by taxpayers to pay (or to evade) it, over and above the amount collected.

deadweight loss

(from a tax) the decrease in total surplus resulting from the tax, minus the tax revenues generated.

excise tax

a tax on sales of a particular good or service.

lump sum tax

a tax of a fixed amount paid by all taxpayers, independent of the taxpayer's income.

progressive tax

a tax that rises more than in proportion to income.

proportional tax

a tax that rises in proportion to income.

regressive tax

a tax that rises less than in proportion to income.

tax incidence

the distribution of the tax burden.

total surplus

the total net gain to consumers and producers from trading in a market; the sum of producer and consumer surplus