Microeconomics- Prelim 2

Cornell HADM 1410

relative price

the value of one good in terms of other goods

allocation mechanism

how the question “who gets the good” gets answered

traditional economic system

an economic system where decisions are based on customs

autocratic/command and control economic system

an economic system where decisions are made based on bureacracy or a govt or an individual

Market System

an economic system where decisions are made based on mutually beneficial and voluntary exchange

perfect competition

a market structure where there are many buyers and sellers, a homogeneous product, perfect information, and free entry and exit

demand

the various quantities of a specific good that consumers are willing and able to purchase at various prices

law of demand

as the price of a good increases, the quantity demanded decreases

supply

the various quantities of a specific good that producers are willing and able to sell at various prices

alexander’s law of supply

because per unit production costs increase as more output is produced, businesses need to receive a higher per unit price to get them to produce more output

ceteris paribus

latin for everything else held constant

equilibrium

a situation in which there’s no tendency for change

shortage/excess demand

when the quantity demanded is greater than the quantity supplied at the prevailing price

surplus/excess supply

when the quantity supplied is greater than the quantity demanded at the prevailing price

substitute

goods used as alternatives to one another

complement

goods used together as a package

normal good

goods for which an increase in income leads to an increase in demand

inferior good

goods for which an increase in income leads to a decrease in demand

expectations

perceptions about what the future holds

price floor/effective price floor

a govt imposed minimum price; to be effective it must be set above the market clearing price

price ceiling/effective price ceiling

a govt imposed maximum price; to be effective it must be set below the market clearing price

momentary supply

the quantity supplied available at a specific time

short-run supply

the various quantities of a specific good that producers are willing and able to sell in the short-run

long-run supply

the various quantities of a specific good that producers are willing and able to sell in the long-run

quota

a govt limit on the amount that can be produced, consumed, and exchanged

tax

a govt policy that typically increases Pc and decreases Pp

negative consumption externality

a bad thing that consumers are doing while consuming a product that affects others, but is not taken into account by the market participants

negative production externality

a bad thing that producers are doing while producing a product that affects others, but is not taken into account by the market participants

subsidy

a govt policy that typically increases Pp and decreases Pc

positive consumption externality

a good thing that consumers are doing while consuming a product that affects others, but is not taken into account by the market participants

positive production externality

a good thing that producers are doing while producing a product that affects others, but is not taken into account by the market participants

consumer’s burden from a tax

the share of the govt’s revenue from a tax that is due to the increase in Pc

producer’s burden from a tax

the share of the govt’s revenue from a tax that is due to the decrease in Pp

consumer’s benefit from a subsidy

the share of the govt’s expenditures on a subsidy that is due to the decrease in Pc

producer’s benefit from a subsidy

the share of the govt’s expenditures on a subsidy that is due to the increase in Pp

price elasticity of demand

measures the percent change in the quantity demanded given the percent change in price

point method

using the intial value as the point of reference for a percent change calculation

arc method (mid-point method)

using the average of the initial and end values as the point of reference for a percent change calculation

elastic demand

when the percent change in quantity is greater than than the percent change in price that induced it

perfectly elastic demand

when elasticity of demand (n) is negative infinity

inelastic demand

when the percent change in quantity is less than than the percent change in price that induced it

perfectly inelastic demand

when elasticity of demand (n) is zero

unit elastic demand

when elasticity of demand (n) is -1

total revenue

P*Q

income elasticity

% change in Q (demanded) / % change in y (income)

cross price elasticity

% change in Qx (demand for one good) / % change in Pz (price of another good)

elasticity of supply

% change in Q (supplied) / % change in P (price)