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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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Market Adjustment Process
The self‐correcting movement of prices and quantities toward equilibrium as shortages raise prices and surpluses lower prices until Qd = Qs.
Surplus (Excess Supply)
A situation where quantity supplied exceeds quantity demanded, creating downward pressure on price.
Shortage (Excess Demand)
A situation where quantity demanded exceeds quantity supplied, creating upward pressure on price.
Law of Demand
States that, ceteris paribus, quantity demanded is inversely related to price.
Movement along Demand Curve
Change in quantity demanded caused solely by a change in the good’s own price.
Shift in Demand Curve
Change in demand caused by non-price determinants, moving the entire curve left or right.
TIGER PIE
Acronym for demand shifters: Taste, Income, Government policy, Expectations, Related-goods prices, Population, Interest rates, Exchange rates.
Supply
The quantity producers are willing and able to sell at various prices; upward-sloping due to profit incentives and LDMR.
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.
Movement along Supply Curve
Change in quantity supplied caused only by a price change of the good itself.
Shift in Supply Curve
Change in supply due to non-price factors, moving the entire curve.
CREW
Acronym for supply shifters: Cost of production, Related goods, Expectations/entry-exit, Weather.
Consumer Surplus
Difference between the maximum price consumers are willing to pay and the price they actually pay.
Producer Surplus
Difference between the price producers receive and the minimum price they are willing to accept.
Society’s Welfare
The sum of consumer surplus and producer surplus in a market.
Allocative Efficiency
Resource allocation where the mix of goods and services maximises societal welfare.
Productive Efficiency
Situation where all resources are fully and efficiently utilised, producing at lowest cost.
Price Elasticity of Demand (PED)
Percentage change in quantity demanded divided by percentage change in price; always negative, so magnitude is used.
Price Elastic Demand
Demand with |PED| > 1; quantity demanded responds more than proportionately to price changes.
Price Inelastic Demand
Demand with |PED| < 1; quantity demanded responds less than proportionately to price changes.
SHIT
Acronym for PED determinants: Substitutes availability, Habitual consumption, Income proportion, Time.
Price Elasticity of Supply (PES)
Percentage change in quantity supplied divided by percentage change in price; always positive.
Price Elastic Supply
Supply with PES > 1; quantity supplied responds more than proportionately to price changes.
Price Inelastic Supply
Supply with PES < 1; quantity supplied responds less than proportionately to price changes.
SALT
Acronym for PES determinants: Stock levels, Availability of spare capacity, Length of production, Time period (short-run vs long-run).
Cross Elasticity of Demand (XED)
Measures responsiveness of demand for one good to a price change of another good.
Substitutes
Goods with positive XED; a price rise in one increases demand for the other.
Complements
Goods with negative XED; a price rise in one decreases demand for the other.
Income Elasticity of Demand (YED)
Measures responsiveness of demand to changes in consumer income.
Inferior Good
Good with YED < 0; demand falls as income rises.
Necessity (Normal) Good
Good with 0 < YED < 1; demand rises less than proportionately with income.
Luxury Good
Good with YED > 1; demand rises more than proportionately with income.
Indirect Tax
Compulsory payment levied on goods and services, collected from suppliers.
Specific Tax
Fixed amount of tax per unit; shifts supply curve vertically upward in parallel.
Ad Valorem Tax
Percentage tax on value; pivots the supply curve upward from the origin.
Direct Tax
Tax on income or wealth paid directly by the economic agent to authorities.
Indirect Subsidy
Cash transfer to suppliers lowering production costs and shifting supply down/right.
Ad Valorem Subsidy
Subsidy equal to a percentage of price; pivots supply curve downward toward the origin.
Direct Subsidy
Cash payment given directly to consumers, effectively increasing demand.
Price Floor
Legally imposed minimum price above equilibrium, protecting producers and creating surpluses.
Price Ceiling
Legally imposed maximum price below equilibrium, aimed at affordability but causing shortages.
Deadweight Loss
Net loss of total surplus arising from market distortions like taxes, subsidies, floors or ceilings.
Production Quota
Government limit on the quantity firms may supply, restricting output and raising price.