Microeconomics: Market Mechanisms, Elasticities & Government Intervention

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Vocabulary flashcards covering demand & supply mechanics, elasticities, welfare measures and government interventions found in the lecture notes.

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43 Terms

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Market Adjustment Process

The self‐correcting movement of prices and quantities toward equilibrium as shortages raise prices and surpluses lower prices until Qd = Qs.

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Surplus (Excess Supply)

A situation where quantity supplied exceeds quantity demanded, creating downward pressure on price.

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Shortage (Excess Demand)

A situation where quantity demanded exceeds quantity supplied, creating upward pressure on price.

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Law of Demand

States that, ceteris paribus, quantity demanded is inversely related to price.

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Movement along Demand Curve

Change in quantity demanded caused solely by a change in the good’s own price.

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Shift in Demand Curve

Change in demand caused by non-price determinants, moving the entire curve left or right.

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TIGER PIE

Acronym for demand shifters: Taste, Income, Government policy, Expectations, Related-goods prices, Population, Interest rates, Exchange rates.

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Supply

The quantity producers are willing and able to sell at various prices; upward-sloping due to profit incentives and LDMR.

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Law of Diminishing Marginal Returns (LDMR)

Principle that additional units of a variable input eventually add less output, contributing to the upward slope of supply.

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Movement along Supply Curve

Change in quantity supplied caused only by a price change of the good itself.

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Shift in Supply Curve

Change in supply due to non-price factors, moving the entire curve.

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CREW

Acronym for supply shifters: Cost of production, Related goods, Expectations/entry-exit, Weather.

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Consumer Surplus

Difference between the maximum price consumers are willing to pay and the price they actually pay.

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Producer Surplus

Difference between the price producers receive and the minimum price they are willing to accept.

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Society’s Welfare

The sum of consumer surplus and producer surplus in a market.

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Allocative Efficiency

Resource allocation where the mix of goods and services maximises societal welfare.

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Productive Efficiency

Situation where all resources are fully and efficiently utilised, producing at lowest cost.

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Price Elasticity of Demand (PED)

Percentage change in quantity demanded divided by percentage change in price; always negative, so magnitude is used.

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Price Elastic Demand

Demand with |PED| > 1; quantity demanded responds more than proportionately to price changes.

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Price Inelastic Demand

Demand with |PED| < 1; quantity demanded responds less than proportionately to price changes.

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SHIT

Acronym for PED determinants: Substitutes availability, Habitual consumption, Income proportion, Time.

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Price Elasticity of Supply (PES)

Percentage change in quantity supplied divided by percentage change in price; always positive.

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Price Elastic Supply

Supply with PES > 1; quantity supplied responds more than proportionately to price changes.

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Price Inelastic Supply

Supply with PES < 1; quantity supplied responds less than proportionately to price changes.

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SALT

Acronym for PES determinants: Stock levels, Availability of spare capacity, Length of production, Time period (short-run vs long-run).

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Cross Elasticity of Demand (XED)

Measures responsiveness of demand for one good to a price change of another good.

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Substitutes

Goods with positive XED; a price rise in one increases demand for the other.

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Complements

Goods with negative XED; a price rise in one decreases demand for the other.

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Income Elasticity of Demand (YED)

Measures responsiveness of demand to changes in consumer income.

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Inferior Good

Good with YED < 0; demand falls as income rises.

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Necessity (Normal) Good

Good with 0 < YED < 1; demand rises less than proportionately with income.

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Luxury Good

Good with YED > 1; demand rises more than proportionately with income.

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Indirect Tax

Compulsory payment levied on goods and services, collected from suppliers.

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Specific Tax

Fixed amount of tax per unit; shifts supply curve vertically upward in parallel.

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Ad Valorem Tax

Percentage tax on value; pivots the supply curve upward from the origin.

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Direct Tax

Tax on income or wealth paid directly by the economic agent to authorities.

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Indirect Subsidy

Cash transfer to suppliers lowering production costs and shifting supply down/right.

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Ad Valorem Subsidy

Subsidy equal to a percentage of price; pivots supply curve downward toward the origin.

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Direct Subsidy

Cash payment given directly to consumers, effectively increasing demand.

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Price Floor

Legally imposed minimum price above equilibrium, protecting producers and creating surpluses.

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Price Ceiling

Legally imposed maximum price below equilibrium, aimed at affordability but causing shortages.

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Deadweight Loss

Net loss of total surplus arising from market distortions like taxes, subsidies, floors or ceilings.

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Production Quota

Government limit on the quantity firms may supply, restricting output and raising price.