Microeconomics Exam 2

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

binding price ceiling

Prevents market moving up to reach equilibrium

binding price floor

Prevents market from moving down to reach equilibrium

economic burden

Burden created by change in after-tax prices faced by buyers and sellers

mandate

Requirement to buy or sell a minimum amount of a good

price ceiling

Maximum price that sellers can charge

price floor

Minimum price that sellers can charge

quotas

Limit on the maximum quantity of a good that can be bought or sold

statutory burden

Burden of being assigned by the government to send a tax payment

subsidy

Payment made by the government to those who make a specific choice

tax incidence

Division of economic burden of a tax between sellers and buyers

consumer surplus

Economic surplus you get from buying something = MB - P

deadweight loss

How far economic surplus falls below efficient outcome

distributional consequences

Who gets what?

economic efficiency

Outcome is more economically efficient if it yields a greater economic surplus

economic surplus

Consumer surplus + producer surplus = MB-MC

efficient allocation

Allocating goods to create largest economic surplus

efficient outcome

Yields largest economic surplus

efficient production

Producing a given quantity of output at the lowest possible cost

efficient quantity

Quantity that produces the largest economic surplus

equity

Measure of fairness in the distribution of economic benefits

government failure

When government policies lead to worse outcomes

market failure

When an inefficient outcome occurs (MB ≠ MC)

normative analysis

Prescribes what should happen

positive analysis

Describes what is happening, explains why, or predicts what is going to happen

producer surplus

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

voluntary exchange

Buyers and sellers exchange money for goods only if they both want to

cap and trade

Quantity regulation implemented by a fixed number of permits which can then be traded

club good

Excludable, nonrival goods

Coase Theorem

If bargaining is costless and property rights are clearly established and enforced, externality problems can be solved by private bargains

common resources

Non-excludable, rival goods

corrective subsidy

Government payment to encourage behaviors that generate positive externalities, promoting socially beneficial production or consumption

corrective tax

Government tax to discourage behaviors that generate negative externalities, promoting socially beneficial production or consumption

externality

Side effect of an activity that affects bystanders whose interests are not taken into account

free-rider problem

Someone enjoys the benefits of a good without dealing with the costs

marginal external benefit

Extra benefit to bystanders

marginal external cost

Extra cost imposed on bystanders

marginal private benefit

Extra enjoyment by the buyer from purchasing one extra unit

marginal private cost

Extra cost paid by seller from producing one extra unit

marginal social benefit

All marginal benefits

marginal social cost

All marginal costs

negative externality

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

positive externality

Side effects that benefit bystanders

public good

Non-excludable, non-rival goods

Rational Rule for Society

Socially optimal quantity is where MSB = MSC

rival good

When your use of something does not allow others to use it

socially optimal quantity

Most efficient quantity for society as a whole including the interests of buyers, sellers, and bystanders

tragedy of the commons

When abuse/overuse of common resources does not leave enough for everyone