ECO Exam 2

elasticity

is a numerical measure of the responsiveness of Qd or Qs to one of its determinants

price elasticity of demand

measures how much Qd responds to a change in P

price elasticity of supply

measures how much Qs responds to a change in P

income elasticity of demand

measures the response of Qd to a change in consumer income

income elasticity of demand formula

cross price elasticity of demand

measured the response of demand for one good changes in the price of another good

cross-price elast formula

Cross-price elast. of demand = % change in Qd for good 1/ % change in price of good 2

price ceiling

a legal maximum on the price of a good or service ex:rent control

price floor

a legal minimum on the price of good or service ex: minimum wage

the INCIDENCE of a tax

how the burden of tax is shared among participants

allocation of resources

how much of a good is produced, who produced is, who consumes it

welfare economics

studies how the allocation of resources affects economic well-being

willingness to pay

max a buyer will pay for a good

cost

value of everything

producer surplus

amount seller is paid for a good minus sellers cost

externality

uncompensated impact of one persons actions on the well-being of bystander

internalizing the externality

altering incentives so that people take account of the external effect of their actions

corrective tax

a tax designed to induce private decision-makers to take account of the social costs

The coase theorem

if private parties can bargain (at zero cost) over the allocation of resources, they can solve the externalities on their own

transaction costs

the costs parties incur in the process of agreeing to and following through on a bargain

excludable

if a person can be prevented from using it

rival in consumption

if one person’s use of it dimishes others use

Private goods

excludable, rival in consumption

public good

not excludable, not rival

common resources

rival but not excludable

Club goods

excludable but not rival

free rider

a person who recieve the benefit of a good but avoids paying for it

cost benefit analysis

a study that compares the costs and benefits of providing a public good