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Microeconomics Test 1
Microeconomics Test 1
285
Economics
Undergraduate 2
05/16/2016

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Term
origin of the word economy
Definition
the Greek word oikonomos, which means "one who manages a household"
Term
scarcity
Definition
the limited nature of society's resources; society has limited resources and therefore can't produce all the goods and services people wish to have
Term
economics
Definition
the study of how society manages its scarce resources
Term
efficiency
Definition
society getting the maximum benefits from its scarce resources; refers to the size of the economic pie
Term
equality
Definition
economic prosperity being uniformly distributed among the members of society; refers to how the pie is divided into individual slices
Term
opportunity cost
Definition
whatever must be given up to obtain an item
Term
rational people
Definition
people who systematically and purposefully do the best they can to achieve their objectives
Term
marginal change
Definition
economists use this term to describe a small incremental adjustment to an existing plan of action
Term
incentive
Definition
something that induces a person to act, such as a punishment or reward
Term
market economy
Definition
economy that allocates resources thru the decentralized decisions of many firms and households as they interact in markets for goods and services
Term
property rights
Definition
the ability of an individual to own and exercise control over scarce resources
Term
market failure
Definition
situation where a market left on its own fails to allocate resources efficiently
Term
externality
Definition
the impact of one person's actions on the well-being of a bystander
Term
market power
Definition
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
Term
productivity
Definition
quantity of goods and services produced from each unit of labor input
Term
inflation
Definition
increase in the overall level of prices in the economy
Term
business cycle
Definition
fluctuations in economic activity, such as employment and production
Term
the 1st principle of economics
Definition
people face trade-offs
Term
the 2nd principle of economics
Definition
the cost of something is what you give up to get it
Term
the 3rd principle of economics
Definition
rational people think at the margin
Term
the 4th principle of economics
Definition
people respond to incentives
Term
the 5th principle of economics
Definition
trade can make everyone better off
Term
the 6th principle of economics
Definition
markets are usually a good way to organize economic activity
Term
the 7th principle of economics
Definition
governments can sometimes improve market outcomes
Term
the 8th principle of economics
Definition
a country's standard of living depends on its ability to produce goods and services
Term
the 9th principle of economics
Definition
prices rise when the government prints too much money
Term
the 10th principle of economics
Definition
society faces a short-term trade-off between inflation and unemployment
Term
circular flow diagram
Definition
visual model of the economy that shows how dollars flow thru markets among households and firms
Term
production possibilities frontier
Definition
graph that shows the combos of output that the economy can possibly produce given the available factors of production and the available production technology
Term
efficient
Definition
when an economy is getting all it can from the resources available
Term
when a production possibilities frontier shifts outward
Definition
when there's a technological advance
Term
microeconomics
Definition
the study of how households and firms make decisions and how they interact in markets
Term
macroeconomics
Definition
the study of economywide phenomena, including inflation, unemployment, and economic growth
Term
positive statements
Definition
claims that attempt to describe the world as it is; how it is
Term
normative statements
Definition
claims that attempt to prescribe how the world should be; how it ought to be
Term
demand curve
Definition
traces out the effect of a good's price on the quantity of the good consumers want to buy
Term
[image]
Definition
1: markets for goods and services
2: firms
3: households
4: markets for factors of production
Term
[image]
Definition
1:
-firms sell
-households buy
2:
-produce and sell goods and services
-hire and use factors of production
3:
-buy and consume goods and services
-own and sell factors of production
4:
-households sell
-firms buy
Term
[image]
Definition
1: spending
2: revenue
3: wages, rent, and profit
4: income
Term
[image]
Definition
1: goods and services sold
2: goods and services bought
3: land, labor, and capital
4: factors of production
Term
examples of economics
Definition
-how people decide what to buy, how much to work, save, and spend
-how firms decide how much to produce, how many workers to hire
-how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs
Term
tradeoff of efficiency vs. equality
Definition
To achieve greater equality, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie.”
Term
Making decisions requires...
Definition
comparing the costs and benefits of alternative choices.
Term
Rational people do this
Definition
-think at the margin
-systematically and purposefully do the best they can to achieve their objectives.
Term
examples of thinking at the margin
Definition
-When a student considers whether to go to college for an additional year, he compares the fees & foregone wages to the extra income he could earn with the extra year of education.
-When a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue.
Term
examples of people responding to incentives
Definition
-When gas prices rise, consumers buy more hybrid cars and fewer gas guzzling SUVs.
-When cigarette taxes increase, teen smoking falls.
Term
the term “economy” simply means...
Definition
a group of people interacting with each other
Term
This determines the prices of goods and the amounts produced and sold.
Definition
the interaction of buyers and sellers
Term
the interaction of buyers and sellers determines...
Definition
the prices of goods and the amounts produced and sold
Term
how countries can benefit from trade and specialization
Definition
-Get a better price abroad for goods they produce
-Buy other goods more cheaply from abroad than could be produced at home
Term
Market
Definition
a group of buyers and sellers (need not be in a single location)
Term
“Organize economic activity” means determining
Definition
-what goods to produce -how to produce them -how much of each to produce -who gets them
Term
how the invisible hand works through the price system
Definition
-The interaction of buyers and sellers determines prices.
-Each price reflects the good’s value to buyers and the cost of producing the good.
-Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being.
Term
Important role for govt
Definition
enforce property rights (with police, courts)
Term
Many fledgling market economies are struggling through the transition from central planning because...
Definition
because they have not developed institutions that protect and enforce property rights.
Term
Public policy may promote...
Definition
efficiency
Term
Govt may alter market outcome to promote...
Definition
equity
Term
example of the gov't promoting equity
Definition
If the market’s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic “pie” is divided.
Term
The most important determinant of living standards
Definition
productivity
Term
Productivity depends on...
Definition
the equipment, skills, and technology available to workers
Term
The principles of decision making
Definition
-People face tradeoffs.
-The cost of any action is measured in terms of foregone opportunities.
-Rational people make decisions by comparing marginal costs and marginal benefits.
-People respond to incentives.
Term
The principles of interactions among people
Definition
-Trade can be mutually beneficial.
-Markets are usually a good way of coordinating trade.
-Govt can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable.
Term
The principles of the economy as a whole
Definition
-Productivity is the ultimate source of living standards.
-Money growth is the ultimate source of inflation.
-Society faces a short-run tradeoff between inflation and unemployment.
Term
the 2 roles played by economists
Definition
-scientists
-policy advisors
Term
Scientists
Definition
try to explain the world
Term
Policy advisors
Definition
try to improve it
Term
scientific method
Definition
the dispassionate development and testing of theories about how the world works
Term
Assumptions
Definition
-simplify the complex world, make it easier to understand
-Unrealistic, but simple to learn and gives useful insights about the real world
Term
model
Definition
a highly simplified representation of a more complicated reality. Economists use models to study economic issues
Term
actors in the circular flow diagram
Definition
-households
-firms
Term
markets in the circular flow diagram
Definition
-the market for goods and services
-the market for “factors of production”
Term
factors of production
Definition
the resources the economy uses to produce goods & services, including
-labor
-land
-capital (buildings and machines used in production)
Term
the role of households in the circular flow diagram
Definition
-Own the factors of production, sell/rent them to firms for income
-Buy and consume goods & services
Term
role of firms in the circular flow diagram
Definition
-Buy/hire factors of production, use them to produce goods and services
-Sell goods & services
Term
The slope of the PPF tells you...
Definition
the opportunity cost of one good in terms of the other
Term
tradeoff faced by society
Definition
Getting more of one good requires sacrificing some of the other
Term
When is a PPF a straight line?
Definition
when opportunity cost remains constant
Term
When is the PPF bow-shaped?
Definition
when the opportunity cost of a good rises as more of the good is produced
Term
other reasons the PPF might be bow-shaped
Definition
-So, PPF is bow-shaped when different workers have different skills, different opportunity costs of producing one good in terms of the other.
-The PPF would also be bow-shaped when there is some other resource, or mix of resources with varying opportunity costs (e.g., different types of land suited for different uses).
Term
The PPF illustrates the concepts of...
Definition
tradeoff and opportunity cost, efficiency and inefficiency, unemployment, and economic growth
Term
A bow-shaped PPF illustrates the concept of...
Definition
increasing opportunity cost
Term
why economists disagree
Definition
-Economists often give conflicting policy advice.
-They sometimes disagree about the validity of alternative positive theories about the world.
-They may have different values and, therefore, different normative views about what policy should try to accomplish.
-Yet, there are many propositions about which most economists agree.
Term
the 2 roles played by economists
Definition
-scientists
-policy advisors
Term
Scientists
Definition
try to explain the world
Term
Policy advisors
Definition
try to improve it
Term
scientific method
Definition
the dispassionate development and testing of theories about how the world works
Term
Assumptions
Definition
-simplify the complex world, make it easier to understand
-Unrealistic, but simple to learn and gives useful insights about the real world
Term
model
Definition
a highly simplified representation of a more complicated reality. Economists use models to study economic issues
Term
actors in the circular flow diagram
Definition
-households
-firms
Term
markets in the circular flow diagram
Definition
-the market for goods and services
-the market for “factors of production”
Term
factors of production
Definition
the resources the economy uses to produce goods & services, including
-labor
-land
-capital (buildings and machines used in production)
Term
the role of households in the circular flow diagram
Definition
-Own the factors of production, sell/rent them to firms for income
-Buy and consume goods & services
Term
role of firms in the circular flow diagram
Definition
-Buy/hire factors of production, use them to produce goods and services
-Sell goods & services
Term
The slope of the PPF tells you...
Definition
the opportunity cost of one good in terms of the other
Term
tradeoff faced by society
Definition
Getting more of one good requires sacrificing some of the other
Term
When is a PPF a straight line?
Definition
when opportunity cost remains constant
Term
When is the PPF bow-shaped?
Definition
when the opportunity cost of a good rises as more of the good is produced
Term
other reasons the PPF might be bow-shaped
Definition
-So, PPF is bow-shaped when different workers have different skills, different opportunity costs of producing one good in terms of the other.
-The PPF would also be bow-shaped when there is some other resource, or mix of resources with varying opportunity costs (e.g., different types of land suited for different uses).
Term
The PPF illustrates the concepts of...
Definition
tradeoff and opportunity cost, efficiency and inefficiency, unemployment, and economic growth
Term
A bow-shaped PPF illustrates the concept of...
Definition
increasing opportunity cost
Term
why economists disagree
Definition
-Economists often give conflicting policy advice.
-They sometimes disagree about the validity of alternative positive theories about the world.
-They may have different values and, therefore, different normative views about what policy should try to accomplish.
-Yet, there are many propositions about which most economists agree.
Term
Exports
Definition
goods produced domestically and sold abroad
Term
imports
Definition
goods produced abroad and sold domestically
Term
one reason interdependence is good
Definition
it makes a country able to consume more of something than it would be able to produce
Term
Absolute advantage
Definition
the ability to produce a good using fewer inputs than another producer
Term
Two countries can gain from trade when...
Definition
each specializes in the good it produces at lowest cost.
Term
Absolute advantage measures...
Definition
the cost of a good in terms of the inputs required to produce it.
Term
Comparative advantage
Definition
the ability to produce a good at a lower opportunity cost than another producer
Term
Absolute advantage (is or is not) necessary for comparative advantage!
Definition
is not
Term
Gains from trade arise from...
Definition
comparative advantage (differences in opportunity costs).
Term
When each country specializes in the good(s) in which it has a comparative advantage,...
Definition
total production in all countries is higher, the world’s “economic pie” is bigger, and all countries can gain from trade.
Term
Interdependence and trade allow everyone to...
Definition
enjoy a greater quantity and variety of goods & services.
Term
when the economic "pie" grows
Definition
when people—or countries—specialize in the goods in which they have a comparative advantage
Term
market
Definition
a group of buyers and sellers of a particular product
Term
competitive market
Definition
one with many buyers and sellers, each has a negligible effect on price
Term
In a perfectly competitive market,...
Definition
-All goods exactly the same
-Buyers & sellers so numerous that no one can affect market price—each is a “price taker”
Term
quantity demanded
Definition
the amount of the good that buyers are willing and able to purchase
Term
Law of demand
Definition
the claim that the quantity demanded of a good falls when the price of the good rises, other things equal
Term
Demand schedule
Definition
a table that shows the relationship between the price of a good and the quantity demanded
Term
The quantity demanded in the market
Definition
the sum of the quantities demanded by all buyers at each price
Term
Qd
Definition
quantity demanded
Term
some Demand Curve Shifters
Definition

PYNTE

 

-# of Buyers

-income

-Prices of Related Goods

-Tastes

-Expectations

Term
Income vs. Demand for a normal good
Definition
Demand for a normal good is positively related to income.
Term
Income vs. Demand for an inferior good
Definition
Demand for an inferior good is negatively related to income.
Term
substitutes
Definition
Two goods are substitutes if an increase in the price of one causes an increase in demand for the other.
Term
complements
Definition
Two goods are complements if an increase in the price of one causes a fall in demand for the other.
Term
how tastes affect demand curve
Definition
Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right.
Term
how Expectations affect demand curve
Definition
Expectations affect consumers’ buying decisions.
Term
quantity supplied
Definition
-the amount that sellers are willing and able to sell
-this is the sum of the quantities supplied by all sellers at each price
Term
Law of supply
Definition
the claim that the quantity supplied of a good rises when the price of the good rises, other things equal
Term
Supply schedule
Definition
A table that shows the relationship between the price of a good and the quantity supplied
Term
What causes a shift in the supply curve?
Definition
"other things" that are non-price determinants of supply
Term
some supply curve shifters
Definition

TINE

 

-input prices

-technology

-# of sellers

-expectations

Term
how input prices shift the supply curve
Definition
A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right
Term
how technology shifts the supply curve
Definition
Technology determines how much inputs are required to produce a unit of output
Term
how # of sellers shifts the supply curve
Definition
An increase in the number of sellers increases the quantity supplied at each price
Term
how expectations shift the supply curve
Definition
In general, sellers may adjust supply* when their expectations of future prices change. (*If good not perishable)
Term
Equilibrium price
Definition
the price that equates quantity supplied with quantity demanded
Term
Equilibrium quantity
Definition
the quantity supplied and demanded at the equilibrium price
Term
Surplus (a.k.a. excess supply)
Definition
when quantity supplied is greater than quantity demanded
Term
Facing a surplus, sellers try to increase sales by...
Definition
cutting price
Term
Shortage (a.k.a. excess demand)
Definition
when quantity demanded is greater than quantity supplied
Term
Facing a shortage, sellers ______ the price
Definition
raise
Term
Three Steps to Analyzing Changes in E'librium
Definition
To determine the effects of any event,
1. Decide whether the event shifts S curve, D curve, or both.
2. Decide in which direction curve shifts.
3. Use supply—demand diagram to see how the shift changes eq’m P and Q.
Term
Change in supply
Definition
-a shift in the S curve
-occurs when a non-price determinant of supply changes (like technology or costs)
Term
Change in the quantity supplied
Definition
-a movement along a fixed S curve
-occurs when P changes
Term
Change in demand
Definition
-a shift in the D curve
-occurs when a non-price determinant of demand changes (like income or # of buyers)
Term
Change in the quantity demanded
Definition
- a movement along a fixed D curve
-occurs when P changes
Term
Elasticity
Definition
a numerical measure of the responsiveness of Qd or Qs to one of its determinants
Term
Price elasticity of demand
Definition
-measures how much Qd responds to a change in P -Loosely speaking, it measures the price-sensitivity of buyers’ demand.
Term
equation for price elasticity of demand
Definition
equation for price elasticity of demand=(% change in Qd)/(% change in P) always reported as non-negative number
Term
midpoint method for calculating % change
Definition
((end value–start value)/(midpoint))•100%

always use this to calculate elasticity
Term
Price elasticity is higher when...
Definition
close substitutes are available
Term
Price elasticity is higher for ______ than for ______ ones.
Definition
narrowly defined goods
broadly defined
Term
Price elasticity is higher for ______ than for ______.
Definition
luxuries
necessities
Term
Price elasticity is higher in the ______ run than the ______ run.
Definition
long
short
Term
The price elasticity of demand depends on...
Definition
-the extent to which close substitutes are available
-whether the good is a necessity or a luxury
-how broadly or narrowly the good is defined
-the time horizon—elasticity is higher in the long run than the short run
Term
Rule of thumb for elasticity
Definition
-The flatter the curve, the bigger the elasticity.
-The steeper the curve, the smaller the elasticity.
Term
Five different classifications of D and S curves
Definition
-perfectly inelastic
-inelastic
-unit elastic
-elastic
-perfectly elastic
Term
perfectly inelastic curve
Definition
-vertical
-elasticity=0
-not sensitive
Term
inelastic curve
Definition
-relatively steep
-elasticity<1
-relatively insensitive
Term
unit elastic curve
Definition
-intermediate slope
-elasticity=1
-intermediate sensitivity
Term
elastic curve
Definition
-relatively flat
-elasticity>1
-relatively sensitive
Term
perfectly elastic curve
Definition
-perfectly flat
-elasticity=infinity
-extremely sensitive
Term
equation for revenue
Definition
Revenue = P x Q
Term
When D is elastic, a price increase causes revenue to...
Definition
fall
Term
When D is inelastic, a price increase causes revenue to...
Definition
rise
Term
Price elasticity of supply
Definition
-measures how much Qs responds to a change in P -Loosely speaking, it measures sellers’ price-sensitivity
Term
equation for price elasticity of supply
Definition
equation for price elasticity of supply=(% change in Qs)/(% change in P) Again, use the midpoint method to compute the percentage changes.
Term
Income elasticity of demand
Definition
measures the response of Qd to a change in consumer income
Term
equation for Income elasticity of demand
Definition
Income elasticity of demand=(% change in Qd)/(% change in income)
Term
An increase in income causes an increase in demand for a ______ good.
Definition
normal
Term
Cross-price elasticity of demand
Definition
measures the response of demand for one good to changes in the price of another good
Term
equation for Cross-price elasticity of demand
Definition
Cross-price elasticity of demand=(% change in Qd for good 1)/(% change in Qd for good 2)
Term
cross-price elasticity for substitutes
Definition
>0
Term
cross-price elasticity for complements
Definition
<0
Term
When demand is ______, total revenue rises when price rises. When demand is ______, total revenue falls when price rises.
Definition
inelastic
elastic
Term
midpoint method for calculating % change
Definition
((end value–start value)/(midpoint))•100%

always use this to calculate elasticity
Term
Price elasticity is higher when...
Definition
close substitutes are available
Term
Price elasticity is higher for ______ than for ______ ones.
Definition
narrowly defined goods
broadly defined
Term
Price elasticity is higher for ______ than for ______.
Definition
luxuries
necessities
Term
Price elasticity is higher in the ______ run than the ______ run.
Definition
long
short
Term
The price elasticity of demand depends on...
Definition
-the extent to which close substitutes are available
-whether the good is a necessity or a luxury
-how broadly or narrowly the good is defined
-the time horizon—elasticity is higher in the long run than the short run
Term
Rule of thumb for elasticity
Definition
-The flatter the curve, the bigger the elasticity.
-The steeper the curve, the smaller the elasticity.
Term
Five different classifications of D and S curves
Definition
-perfectly inelastic
-inelastic
-unit elastic
-elastic
-perfectly elastic
Term
perfectly inelastic curve
Definition
-vertical
-elasticity=0
-not sensitive
Term
inelastic curve
Definition
-relatively steep
-elasticity<1
-relatively insensitive
Term
unit elastic curve
Definition
-intermediate slope
-elasticity=1
-intermediate sensitivity
Term
elastic curve
Definition
-relatively flat
-elasticity>1
-relatively sensitive
Term
perfectly elastic curve
Definition
-perfectly flat
-elasticity=infinity
-extremely sensitive
Term
equation for revenue
Definition
Revenue = P x Q
Term
When D is elastic, a price increase causes revenue to...
Definition
fall
Term
When D is inelastic, a price increase causes revenue to...
Definition
rise
Term
Price elasticity of supply
Definition
-measures how much Qs responds to a change in P -Loosely speaking, it measures sellers’ price-sensitivity
Term
equation for price elasticity of supply
Definition
equation for price elasticity of supply=(% change in Qs)/(% change in P) Again, use the midpoint method to compute the percentage changes.
Term
Income elasticity of demand
Definition
measures the response of Qd to a change in consumer income
Term
equation for Income elasticity of demand
Definition
Income elasticity of demand=(% change in Qd)/(% change in income)
Term
An increase in income causes an increase in demand for a ______ good.
Definition
normal
Term
Cross-price elasticity of demand
Definition
measures the response of demand for one good to changes in the price of another good
Term
equation for Cross-price elasticity of demand
Definition
Cross-price elasticity of demand=(% change in Qd for good 1)/(% change in Qd for good 2)
Term
cross-price elasticity for substitutes
Definition
>0
Term
cross-price elasticity for complements
Definition
<0
Term
When demand is ______, total revenue rises when price rises. When demand is ______, total revenue falls when price rises.
Definition
inelastic
elastic
Term
Price ceiling
Definition
a legal maximum on the price of a good or service
Example: rent control
Term
Price floor
Definition
a legal minimum on the price of a good or service
Example: minimum wage
Term
non-binding price ceiling
Definition
above market e'librium; no effect on market outcome
Term
binding price ceiling
Definition
below market e'librium; causes shortage

the ceiling is a binding constraint
Term
When a shortage is caused by a price ceiling, why is the shortage larger in the long run?
Definition
because in the long run, supply and demand are more price-elastic
Term
Some rationing mechanisms and why they're often unfair and inefficient
Definition
(1) Long lines
(2) Discrimination according to sellers’ biases

often unfair and inefficient because the goods do not necessarily go to the buyers who value them most highly
Term
when prices are not controlled, the rationing mechanism is...
Definition
efficient (the goods go to the buyers that value them most highly) and impersonal (and thus fair)
Term
non-binding price floor
Definition
below e'librium; no effect on market outcome
Term
binding price floor
Definition
above e'librium; creates surplus; it's a binding constraint
Term
the role of prices in markets
Definition
Prices are the signals that guide the allocation of society’s resources. This allocation is altered when policymakers restrict prices.
Term
why the govt levies taxes on many goods & services
Definition
to raise revenue to pay for national defense, public schools, etc.
Term
When a tax is levied on buyers, what happens to the demand curve?
Definition
goes down by the amount of the tax
Term
Incidence of a Tax
Definition
how the burden of a tax is shared among market participants, i.e., buyers and sellers

depends on price elasticities of supply and demand
Term
When a tax is levied on sellers, what happens to the supply curve?
Definition
goes up by the amount of tax
Term
what tax does to buyers and sellers
Definition
drives a wedge between the price buyers pay and the price sellers receive (increases the amount buyers pay and decreases the amount sellers receive)

e'librium quantity falls
Term
When supply is more elastic than demand,...
Definition
buyers bear most of the burden of the tax.
Term
When demand is more elastic than supply,...
Definition
sellers bear most of the burden of the tax.
Term
Price ceiling
Definition
a legal maximum on the price of a good or service
Example: rent control
Term
Price floor
Definition
a legal minimum on the price of a good or service
Example: minimum wage
Term
non-binding price ceiling
Definition
above market e'librium; no effect on market outcome
Term
binding price ceiling
Definition
below market e'librium; causes shortage

the ceiling is a binding constraint
Term
When a shortage is caused by a price ceiling, why is the shortage larger in the long run?
Definition
because in the long run, supply and demand are more price-elastic
Term
Some rationing mechanisms and why they're often unfair and inefficient
Definition
(1) Long lines
(2) Discrimination according to sellers’ biases

often unfair and inefficient because the goods do not necessarily go to the buyers who value them most highly
Term
when prices are not controlled, the rationing mechanism is...
Definition
efficient (the goods go to the buyers that value them most highly) and impersonal (and thus fair)
Term
non-binding price floor
Definition
below e'librium; no effect on market outcome
Term
binding price floor
Definition
above e'librium; creates surplus; it's a binding constraint
Term
the role of prices in markets
Definition
Prices are the signals that guide the allocation of society’s resources. This allocation is altered when policymakers restrict prices.
Term
why the govt levies taxes on many goods & services
Definition
to raise revenue to pay for national defense, public schools, etc.
Term
When a tax is levied on buyers, what happens to the demand curve?
Definition
goes down by the amount of the tax
Term
Incidence of a Tax
Definition
how the burden of a tax is shared among market participants, i.e., buyers and sellers

depends on price elasticities of supply and demand
Term
When a tax is levied on sellers, what happens to the supply curve?
Definition
goes up by the amount of tax
Term
what tax does to buyers and sellers
Definition
drives a wedge between the price buyers pay and the price sellers receive (increases the amount buyers pay and decreases the amount sellers receive)

e'librium quantity falls
Term
When supply is more elastic than demand,...
Definition
buyers bear most of the burden of the tax.
Term
When demand is more elastic than supply,...
Definition
sellers bear most of the burden of the tax.
Term
the allocation of resources refers to
Definition
-how much of each good is produced
-which producers produce it
-which consumers consume it
Term
Welfare economics
Definition
studies how the allocation of resources affects economic well-being.
Term
Willingness to Pay (WTP)
Definition
A buyer’s willingness to pay for a good is the maximum amount the buyer will pay for that good.

measures how much the buyer values the good
Term
the height of the D curve
Definition
At any Q, the height of the D curve is the WTP of the marginal buyer
Term
marginal buyer
Definition
the buyer who would leave the market if P were any higher.
Term
Consumer Surplus (CS)
Definition
the amount a buyer is willing to pay minus the amount the buyer actually pays
Term
equation for consumer surplus
Definition
CS=WTP–P
Term
total CS equals...
Definition
the area under the demand curve above the price, from 0 to Q

expressed in $
Term
2 ways the CS decreases after a rise in price
Definition
1: Fall in CS due to buyers leaving market
2: Fall in CS due to remaining buyers paying higher P
Term
Cost
Definition
the value of everything a seller must give up to produce a good (i.e., opportunity cost).

measure of willingness to sell
Term
At each Q, the height of the S curve is...
Definition
the cost of the marginal seller
Term
marginal seller
Definition
the seller who would leave the market if the price were any lower
Term
Producer surplus (PS)
Definition
the amount a seller is paid for a good minus the seller’s cost
Term
equation for producer surplus
Definition
PS=P–cost
Term
Total PS equals...
Definition
the area above the supply curve under the price, from 0 to Q

expressed in $
Term
another equation for CS
Definition
CS=(value to buyers)–(amount paid by buyers)
=buyers’ gains from participating in the market
Term
another equation for PS
Definition
PS=(amount received by sellers)–(cost to sellers)
=sellers’ gains from participating in the market
Term
total surplus
Definition
Total surplus=CS+PS
=total gains from trade in a market
=(value to buyers)–(cost to sellers)
Term
In a market economy, the allocation of resources determined by...
Definition
the interactions of many self-interested buyers and sellers
Term
An allocation of resources is efficient if...
Definition
it maximizes total surplus
Term
Efficiency means
Definition
that total surplus is maximized, that the goods are produced by sellers with lowest cost, and that they are consumed by buyers who most value them
Term
the market condition that maximizes rotal surplus
Definition
market equilibrium
Term
Can govt raise total surplus by changing the market’s allocation of resources?
Definition
no
Term
Laissez faire
Definition
(French for “allow them to do”): the notion that govt should not interfere with the market
Term
why centrally-planned economies are never very efficient
Definition
because to allocate resources efficiently and maximize total surplus, the planner would need to know every seller’s cost and every buyer’s WTP for every good in the entire economy
Term
market power
Definition
the ability to affect the market price
Term
externalities
Definition
transactions have side effects, called externalities, that affect bystanders. (example: pollution)
Term
The height of the D curve reflects...
Definition
the value of the good to buyers—their willingness to pay for it
Term
The height of the S curve is...
Definition
sellers’ cost of producing the good
Term
To measure society’s well-being, we use...
Definition
total surplus
Term
how to calculate revenue from tax
Definition
$TxQT $T=(tax buyers pay)+(tax sellers pay) QT=quantity bought with tax
Term
deadweight loss (DWL) of the tax
Definition
the fall in total surplus that results from a market distortion, such as a tax

that is, the decline in demand plus the decline in supply (this is the triangle at the intersection of the supply curve and the demand curve)
Term
Which goods or services should govt tax to raise the revenue it needs?
Definition
those with the lowest DWL
Term
Size of DWL depends on...
Definition
the price elasticities of supply and demand
Term
the biggest source of gov't revenue
Definition
tax on labor income
Term
marginal tax rate
Definition
the tax on the last dollar of earnings

for the typical worker, this is about 40%
Term
tax increase vs. DWL
Definition
When a tax increases, DWL rises even more.
Term
the Laffer Curve
Definition
shows the relationship between the size of the tax and tax revenue (revenue increases with tax size to a point, and then starts to decrease with tax size)
Term
why a tax has a DWL
Definition
because it causes consumers to buy less and producers to sell less, thus shrinking the market below the level that maximizes total surplus
Term
how to calculate revenue from tax
Definition
$TxQT $T=(tax buyers pay)+(tax sellers pay) QT=quantity bought with tax
Term
deadweight loss (DWL) of the tax
Definition
the fall in total surplus that results from a market distortion, such as a tax

that is, the decline in demand plus the decline in supply (this is the triangle at the intersection of the supply curve and the demand curve)
Term
Which goods or services should govt tax to raise the revenue it needs?
Definition
those with the lowest DWL
Term
Size of DWL depends on...
Definition
the price elasticities of supply and demand
Term
the biggest source of gov't revenue
Definition
tax on labor income
Term
marginal tax rate
Definition
the tax on the last dollar of earnings

for the typical worker, this is about 40%
Term
tax increase vs. DWL
Definition
When a tax increases, DWL rises even more.
Term
the Laffer Curve
Definition
shows the relationship between the size of the tax and tax revenue (revenue increases with tax size to a point, and then starts to decrease with tax size)
Term
why a tax has a DWL
Definition
because it causes consumers to buy less and producers to sell less, thus shrinking the market below the level that maximizes total surplus
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