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cross-price elasticity of demand
Determines whether two things are complements or substitutes
(Percent change in quantity over percent change in price of other product)
elastic
Buyer is responsive to changes in price, not steep curve
income elasticity of demand
Determines whether two things are normal or inferior goods
(Percent change in quantity over percent change in income)
inelastic
Buyer is not very responsive to changes in price, steep curve
perfectly elastic
Buyer is infinitely responsive to price change, horizontal curve
perfectly inelastic
Buyer is completely non-responsive to price change, vertical curve
price elasticity of demand
Measure of how responsive buyers are to price changes
price elasticity of supply
How responsive sellers are to price changes
total revenue
Total amount received from buyers = price * quantity
Prevents market moving up to reach equilibrium
Prevents market from moving down to reach equilibrium
Burden created by change in after-tax prices faced by buyers and sellers
Requirement to buy or sell a minimum amount of a good
Maximum price that sellers can charge
Minimum price that sellers can charge
Limit on the maximum quantity of a good that can be bought or sold
Burden of being assigned by the government to send a tax payment
Payment made by the government to those who make a specific choice
Division of economic burden of a tax between sellers and buyers
Economic surplus you get from buying something = MB - P
How far economic surplus falls below efficient outcome
distributional consequences
Who gets what?
Outcome is more economically efficient if it yields a greater economic surplus
Consumer surplus + producer surplus = MB-MC
Allocating goods to create largest economic surplus
Yields largest economic surplus
Producing a given quantity of output at the lowest possible cost
Quantity that produces the largest economic surplus
Measure of fairness in the distribution of economic benefits
When government policies lead to worse outcomes
When an inefficient outcome occurs (MB ≠ MC)
Prescribes what should happen
Describes what is happening, explains why, or predicts what is going to happen
Economic surplus from selling something
Rational Rule for Markets
Individuals and firms continue to make transactions as long as the marginal benefit of the last unit consumed or produced is greater than or equal to the marginal cost
Buyers and sellers exchange money for goods only if they both want to
Quantity regulation implemented by a fixed number of permits which can then be traded
Excludable, nonrival goods
If bargaining is costless and property rights are clearly established and enforced, externality problems can be solved by private bargains
Non-excludable, rival goods
corrective subsidy
Government payment to encourage behaviors that generate positive externalities, promoting socially beneficial production or consumption
Government tax to discourage behaviors that generate negative externalities, promoting socially beneficial production or consumption
Side effect of an activity that affects bystanders whose interests are not taken into account
Someone enjoys the benefits of a good without dealing with the costs
Extra benefit to bystanders
Extra cost imposed on bystanders
Extra enjoyment by the buyer from purchasing one extra unit
Extra cost paid by seller from producing one extra unit
All marginal benefits
All marginal costs
Side effects that harm bystanders
non-excludable
When someone cannot be easily excluded from using something
non-rival
When your use of something allows others to use it too
Side effects that benefit bystanders
Non-excludable, non-rival goods
Socially optimal quantity is where MSB = MSC
When your use of something does not allow others to use it
Most efficient quantity for society as a whole including the interests of buyers, sellers, and bystanders
When abuse/overuse of common resources does not leave enough for everyone
