CLEP Microeconomics vocabulary

Law of Demand

As price decreases, quantity demanded increases (inverse relationship).

Law of Supply

As price increases, quantity supplied increases (direct relationship).

Determinants of Demand

Income, tastes, prices of related goods, expectations, number of buyers.

Determinants of Supply

Input prices, technology, expectations, number of sellers.

Market Equilibrium

Point where quantity demanded equals quantity supplied.

Shortage

Quantity demanded exceeds quantity supplied (price below equilibrium).

Surplus

Quantity supplied exceeds quantity demanded (price above equilibrium).

Price Ceiling

Legal maximum price (e.g., rent control); causes shortages if below equilibrium.

Price Floor

Legal minimum price (e.g., minimum wage); causes surpluses if above equilibrium.

Binding vs. Non-binding controls

A control is binding if it affects the market outcome

Elasticity

Measures responsiveness of quantity to changes in price or other factors

Price Elasticity of Demand (PED)

% change in quantity demanded / % change in price.

Elastic Demand

PED > 1; quantity is sensitive to price changes

Inelastic Demand

PED < 1; quantity is less sensitive to price changes

Unit Elastic

PED = 1; proportional response

Total Revenue Test

If price ↑ and total revenue ↓ → demand is elastic

Income Elasticity of Demand

Measures response to income changes (normal vs. inferior goods).

Cross-Price Elasticity of Demand

Measures response to price changes in related goods (substitutes vs. complements).

Price Elasticity of Supply

Measures how quantity supplied responds to price changes.

Consumer Surplus

Difference between what buyers are willing to pay and what they actually pay.

Producer Surplus

Difference between what sellers receive and their minimum acceptable price

Total Surplus

Sum of consumer and producer surplus; maximized at equilibrium.

Deadweight Loss

Loss of total surplus due to market distortion (e.g., tax, price control).

Market Efficiency

Allocation of resources that maximizes total surplus

Tax Incidence

Who actually bears the burden of a tax—buyers or sellers

Elasticity & Incidence

The more inelastic side of the market bears more of the tax burden.

Excise Tax

Per-unit tax on a good; shifts supply curve upward.

Deadweight Loss from Tax

Reduction in total surplus due to decreased quantity traded.