Section 1
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Date created
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Cards (51)
Section 1
(50 cards)
substitute
two goods for which an increase in the price of one leads to a decrease in the demand for the other
inferior good
demand is negatively related to income As income increases, the quantity demanded at each price decreases
short run
within a certain period in the future, at least one input is fixed while others are variable.
price ceiling
occurs when the government puts a legal limit on how high the price of a product can be - to be efficient has to be below the market equilibrium
consumer surplus
the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays
inelastic
is when people buy about the same amount whether the price drops or rises
economic model
simplified version of a complex concept or behavior expressed in the form of a graph, figure, equation, or diagram
deadweight loss
Fall in total surplus that results from a market distortion
Law of Demand
when the price of a product increases, the demand for the same product will fall and vise versa
price-taker
is a person or company that has no control to dictate prices for a good or service.
luxury good
share of spending increases as you get wealthier
sunk cost
cost already committed and cannot be recovered
equilibrium
point at which nobody wants to change their behavior, given what everybody else is doing
perfectly inelastic
regardless of the amount of a product on the market, the price of the product remains the same
incentive
a reason for doing something; something that stimulates action
elasticity
refers the degree to which individuals, consumers or producers change their demand or the amount supplied in response to price or income changes
standing
the people whose welfare you "count"
price elasticity of supply
measures how much quantity supplied responds to a change in price
shortage
quantity demanded is greater than quantity supplied Prices rise until market reaches equilibrium
average cost
(TC/Q) - equal to total cost divided by the number of unit of a good produced
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
efficiency
the state or quality of being efficient
complement
two goods for which an increase in the price of one leads to an increase in the demand for the other
fixed cost
costs that do not vary with the quantity of output produced
surplus (of goods)
when quantity supplied is greater than quantity demanded Prices fall until market reaches equilibrium
producer surplus
the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
marginal cost
the increase in total cost that arises from an extra unit of production
demand curve
a graph of the relationship between the price of a good and the quantity demanded
excise tax
an indirect tax charged by the government on the sale of a particular good or service.
statutory incidence
who physically/legally pays the money?
First Welfare Theorem
Under perfect competition, the market maximizes total social surplus.
Zero Profit Condition
in the long-run, all firms in a competitive firm will earn zero economic profits
price elasticity of demand
measure of the change in the quantity demanded or purchased of a product in relation to its price
cross-price elasticity of demand
measures the response of demand for one good to changes in price of another good
market failure
an inefficient distribution of goods and services in the free market
normal good
demand is positively related to income As income increases, the quantity demanded at each price increases
perfectly elastic
a change in price would eliminate all demand for the product
elastic
As an elastic service/good's price increases, the quantity demanded of that good can drop fast
opportunity cost
the value of the activity forgone is the opportunity cost of the activity chosen
willingness to pay
the maximum amount that a buyer will pay for a particular good
long run
is a period of time in which all factors of production and costs are variable
economic incidence
what are the final losses after accounting for major behavioral changes
supply curve
a graph of the relationship between the price of a good and the quantity supplied
necessity good
share of spending drops as you get wealthier
welfare economics
the study of how the allocation of resources affects economic well-being
total surplus
CS+PS
income elasticity of demand
measures the response of quantity demanded to a change in consumer income
perfect competition
theoretical market structure in which very firm is a price taker. It takes the price as decided by the forces of demand and supply.
the invisible hand
A term used by Adam Smith to describe his belief that individuals seeking their economic self-interest actually benefit society more than they would if they tried to benefit society directly.
Section 2
(1 card)