ECON EXAM 2

WELFARE ECONOMICS

• branch of economics that studies how the allocation of resources affects economic well-being

WILLINGNESS TO PAY / RESERVATION PRICE

• maximum price a consumer will pay for a good or service

CONSUMER SURPLUS

• difference between the willingness to pay for a good (or service) and the price paid to get it

WILLINGNESS TO SELL 

• minimum price a seller will accept to sell a good or service

PRODUCER SURPLUS

• difference between the willingness to sell a good or service and the price the seller receives

TOTAL SURPLUS / SOCIAL WELFARE

• adding consumer and producer surplus

EFFICIENT

• When an allocation of resources maximizes total surplus

EQUITY

• fairness of the distribution of benefits among the members of a society

EXCISE TAXES

• taxes levied on a particular good or service

INCIDENCE

• the burden of taxation on the party who pays the tax through higher prices, regardless of whom the tax is actually levied on

DEADWEIGHT LOSS

• decrease in economic activity caused by market distortions, such as taxes

ELASTICITY

• A measure of the responsiveness of buyers and sellers to changes in price or income; measures “how much”

ELASTIC

• quantity demanded changes significantly as a result of a price change

INELASTIC

• quantity demanded changes a small amount as a result of a price change

IMMEDIATE RUN

• no time for consumers to adjust their behavior to market price changes

SHORT RUN

• make decisions that reflect our immediate or short-term wants, needs, or limitations; Can partially adjust behavior

LONG RUN

• make decisions that reflect our needs, wants, and limitations over a long time horizon; Has time to fully adjust to market conditions

DETERMINANTS OF DEMAND

• substitutes, the share of the budget spent on the good, necessities versus luxury goods, whether the market is broadly or narrowly defined, and time

INCOME ELASTICITY OF DEMAND (EI) 

• measures how a change in income affects spending

CROSS-PRICE ELASTICITY OF DEMAND (EC)

• measures the percentage change in the quantity demanded of one good to the percentage change in the price of a related good

TOTAL REVENUE

• measure of the responsiveness of the quantity supplied to a change in price

PRICE ELASTICITY OF SUPPLY

• measure of the responsiveness of the quantity supplied to a change in price