Term
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Definition
| Curve that shows the various amounts of a product that consumers are willing and able to purchase at each series of possible prices during a specified period of time. |
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Term
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Definition
| Table that shows the relationship between various prices of a good and the quantity of that good demanded at that price. DOES NOT REVEAL WHICH OF THE POSSIBLE PRICES WILL ACTUALLY EXIST IN THE MARKET HOWEVER. |
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Term
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Definition
| States taht other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. |
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Term
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Definition
| Indicates that a lower price increases the purchasing power of a buyer's income, enabling the buyer to purchase more of that product than before. |
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Term
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Definition
| Suggests that at a lower price, buyers have the incentive to substitute the less expensive product for the relatively more expensive one. |
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Term
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Definition
| Illustrates the inverse relationship between price and quantity demanded via downward sloping curve reflective of the law of demand. |
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Term
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Definition
| Addition of quantities demanded by all consumers at each possible price moves from individual to market demand. Found by horizontally summing quantity demanded at each price threshold. |
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Term
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Definition
| Factors EXCLUDING price that influence the amount of any product purchased buy are assumed to be constant when a demand curve is drawn. These include: (1) Consumers' Tastes, (2) Number of Buyers in the Market, (3) Consumers' Income, (4) Prices of Related Goods, and (5) Consumer Expectations. |
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Term
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Definition
| Products whose demand varies directly with money income (i.e. as income increases, demand for product also increases). |
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Term
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Definition
| Products whose demand varies inversely with money income that usually occurs once income exceeds a certain point (i.e. as income increases, demand for second-hand vehicles decreases). |
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Term
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Definition
| A good that can be used in place of another good; and increase in the price of one good increases the demand of the other good. |
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Term
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Definition
| A good that is used together with another good; an increase in the price of one good decreases the emand for its complement. |
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Term
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Definition
| Goods that are not related to one another and as such, a price change in one good does not affect the demand of another. |
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Term
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Definition
| A shift of the demand curve to the right or to the left that occurs because the consumer's state of mind about purchasing the product has been altered due to the determinants of demand. |
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Term
| Change in Quantity Demanded |
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Definition
| A movement from one point to another point on a fixed demand curve that occurs because the prices of a product change. |
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Term
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Definition
| Curve showing the various amounts of a product that producers are willing and able to make available for sale at each successive price during a specific period of time. |
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Term
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Definition
| A table that shows the relationship between the quantities of goods that will be produced at various prices. |
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Term
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Definition
| States that other things equal, as the price rises, the quantity supplied rises, and as the prices fall, the quantity supplied falls. Price represents revenue for businesses and acts as an incentive for production. |
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Term
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Definition
| Illustrates the direct relationship between price and the quantity supplied via the upward sloping curve reflective of the law of supply. Again, market supply is derived through the horizontal summation of all individual supplies. |
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Term
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Definition
| Factors EXCLUDING price that affect the amount of goods supplied but are assumed to be constant when supply curves are drawn. Include: (1) Resources Prices, (2) Technology, (3) Taxes and Subsidies, (4) Prices of Other Goods, (5) Producer Expectations, and (6) Number of Sellers. |
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Term
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Definition
| Change in the supply schedule and a shift in the curve to right or left that results from changes in the determinants of supply. |
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Term
| Change in Quantity Demanded |
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Definition
| A movement from one point to another on a fixed supply curve that results from a change in the price of that product. |
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Term
| Equilibrium Price (Market-Clearing Price) |
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Definition
| Price where the intentions of buyers and sellers match and where quantity demanded equals quantity supplied. |
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Term
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Definition
| The quantity at which the quantity demanded and quantity supplied match such that there is neither a surplus or shortage of that good. This is indicated by the intersection of the supply and demand curves. |
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Term
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Definition
| Excess supply that occurs at above-equilibrium prices as quantity supplied exceeds the quantity demanded, but eventually surpluses drive prices down. |
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Term
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Definition
| Lack of supply that occurs at below-equilibrium prices as quantity demanded exceeds quantity supplied, a scenario in which prices will be driven up due to competition of buyers. |
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Term
| Rationing Function of Prices |
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Definition
| Ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent. |
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Term
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Definition
| Sets the maximum legal price a seller may charge for a product or service so that consumers may obtain an "essential" good they could not afford otherwise. They render the rationing ability of the market ineffective and create a lasting shortage of goods. Government must again intervene to ration these products. |
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Term
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Definition
| An illegal trade in which scarce goods officially controlled by government are bought and sold for prices above the legal limit. |
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Term
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Definition
| A minimum price fixed by the government that is above the equilibrium price for that good so as to provide a sufficient income for certain groups of suppliers or producers. Results in a chronic surplus of goods as the supply exceeds demand and forces government to remedy surplus by restricting supply or paying for the remaining surplus not purchased by consumers. Finally, brings into question imports and causes tariffs to be enacted. |
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Term
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Definition
| Are exhaustive in that the products purchased directly absorb resources and are part of the domestic output. |
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Term
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Definition
| Are non-exhaustive in that they do not directly absorb resources or create output (recipients make no current contribution to domestic output in return for them). |
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Term
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Definition
| The income that governments receive from running various government-owned enterprises such as toll roads, hospitals, utilities, and lotteries. |
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Term
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Definition
| Government spending that is financed through borrowing because a government's budget is considered to be "in deficit" if spending exceeds revenues in a given period of time. |
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Term
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Definition
| Kingpin of federal tax system as it levies taxes on the incomes of households and businesses after certain exemptions and deductions are taken into account. |
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Term
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Definition
| People wiht higher incomes pay a larger percentage of their incomes as taxes than do people with lower income. |
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Term
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Definition
| The rate at which the income tax is paid on each additional unit of taxable income within each successive tax bracket. |
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Term
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Definition
| The total tax paid divided by the total taxable income that does not overstate the tax burden as the marginal rate may. |
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Term
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Definition
| Taxes based on wages and salaries used to finance compulsory federal program for retired workers - social security and Medicare. Employees and employers pay this tax equally. |
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Term
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Definition
| Levied on a corporation's profit (difference between the total revenue and total expenses) that is usually 35%. |
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Term
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Definition
| Taxes on commodities or on purchases that accounts for approximately 3% of federal revenue. Sales taxes fall on a variety of goods and are a certain percentage of the price, but excise taxes are on a select number of goods and are levied on a per-unit basis. |
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Term
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Definition
| Taxes levied on properties owned that constitute a large majority of local tax revenues |
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Term
| Benefits-Received Principle |
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Definition
| Asserts that those who benefit most from government-supplied goods and services should pay the taxes necessary to finance them. Issues: Difficult to exclude nonpayers and it is self-defeating to make the poor pay for their own welfare. |
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Term
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Definition
| Asserts that the tax burden should be apportioned according to taxpayers' income and wealth on the basis of the law of diminishing marginal utility on each additional dollar earned. Issues: Difficult to estimate how much more a wealthy household should have to pay. |
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Term
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Definition
| Average tax rates increase as income increases that claims a larger absolute value and income percentage as the income increases. |
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Term
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Definition
| Average tax rates decline as income increases that may claim smaller absolute value and income percentage as the income increases. |
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Term
| Proportional Tax (Flat Tax) |
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Definition
| Average tax rates remain the same regardless of the size of income and are often referred to as flat rate taxes due to the invariable rate. |
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Term
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Definition
| The degree to which a tax falls on a particular person or group because those on whom taxes are levied do not always pay the taxes. |
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Term
| Efficiency Loss of the Tax |
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Definition
| Society's sacrifice of net benefit because the tax reduces production and consumption of the product below their levels of economic efficiency where MC=MB. OTHER THINGS EQUAL, THE GREATER THE ELASTICITIES OF SUPPLY AND DEMAND, THE GREATER THE EFFICIENCY LOSS OF A CERTAIN TAX. |
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Term
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Definition
| Government attempts to redistribute wealth and income through progressive taxes that may or may not result in substantial efficiency losses. |
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Term
| Reduction of Negative Exertnalities |
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Definition
| An excise tax on the producers creating spillovers might improve allocative efficiency by reducing output and lessening the externality. |
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Term
| Price Elasticity of Demand |
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Definition
Measures the responsiveness or sensitivity of consumers to a price change as reflected by the change in quantity purchased.
Formula: Ed = Percentage Change in Quantity Demanded
Percentage Change in Price |
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Term
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Definition
| Consumers are sensitive to price changes, resulting in larger changes in quantity (i.e. as price increases, quantity sold decreases and vice versa). From equation, demand is elastic if Ed > 1. |
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Term
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Definition
| Consumers are insensitive to price changes, resulting in only a small change in quantity if any (i.e. price increases, quantity sold only slightly decreases and vice versa). From equation, demand is inelastic if Ed < 1. |
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Term
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Definition
Formula for calculating elasticity that averages the two prices and two quantities so that these can be used as reference points, ensuring consistency.
Change in Quantity
Sum of Quantities/2
Change in Prices
Sum of Prices/2 |
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Term
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Definition
| Consumers are indifferent to price changes as the change in price equals the change in quantity sold. From the equation, demand is unit elastic only if Ed = 1. |
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Term
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Definition
| Extreme situation in which a price change results in no change whatsoever in the quantity demanded. Graphically represented as a vertical line as Ed = 0 because there is no response. |
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Term
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Definition
| Extreme situation in which a small price change causes consumers to increase purchases from zero to all that they can possibly attain. Graphically depicted as a horizontal line and Ed = ∞. |
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Term
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Definition
The total amount that the seller receives from the sale of a product in a given time period that is calculated by multiplying the product price (P) by quantity sold (Q).
TR = P x Q |
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Term
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Definition
Notes what happens to total revenue (area under demand curve) when the price changes to determine whether the demand is elastic or inelastic. Elasticity typically varies over different price ranges for a given demand curve.
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Elastic Demand if price change and total revenue move in opposite directions
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Inelastic Demand if price change and total revenue move in same direction
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Unit Elastic if price change and total reveue remain equal
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Term
| Determinants of Price Elasticity of Demand |
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Definition
| Factors that influence the price elasticity of demand, but to what extent is unknown. Includes: Substitutability, Proportion of Income, Luxuries vs. Necessities, and Time. |
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Term
| Price Elasticity of Supply |
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Definition
Measures the responsiveness or sensitivity of sellers to price changes.
Formula: Es=Percentage Change in Quantity
Percentage Change in Price |
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Term
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Definition
Producers are responsive to price changes and are able to quickly shift production resources to alternative uses. From equation, supply is elastic if Es > 1. |
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Term
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Definition
| Producers are unresponsive to price changes and do not quickly reallocate resources. From the equation, supply is inelastic when 0 ≤ Es < 1. |
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Term
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Definition
| The price change and quantity supplied are the same. From equation, Es = 1. |
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Term
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Definition
| The period that occurs when the time immediately after a change in market price it too short for producers to respond. The supply is inelastic and appears as a vertical supply curve. |
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Term
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Definition
| A period of time too short to change plant capacity but long enough to use the fixed-size plant more/less efficiently. The supply curve better reflects demand curve and there is a smaller price change as well as lower equilibrium price. |
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Term
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Definition
| Time period long enough for firms to adjust plant sizes and for others to enter or exit the industry. The supply curve is more elastic and their is a smaller price increase but a larger output. |
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Term
| Cross Elasticity of Demand |
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Definition
Measures how sensitive consumer purchases of product X are to a change in the price of some other product Y.
Exy = Percentage Change in Quantity of X
Percentage Change in Price of Y
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Positive Exy means X and Y are substitute goods as sales of good X move in same direction as price change in good Y
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Negative Exy means X and Y are complementary goods as an increase in price of good Y decreases quantity demanded of good X
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Zero or near zero Exy suggests that products X and Y are independent goods and unrelated
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Term
| Income Elasticity of Demand |
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Definition
Measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good.
Ei = Percentage Change in Quantity
Percentage Change in Income
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Positive Ei means the products are normal goods (demand increases with increase in income)
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Negative Ei means the products are inferior goods (demand decreases with increase in income)
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Small Ei means goods are "essential" rather than "luxury" as there will be little fluctuation with former
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Term
| Law of Diminishing Marginal Utility |
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Definition
| Principle that added satisfaction declines as a consumer acquires additional units of a given product. Also explains the downsloping marginal utility curve. |
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Term
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Definition
| The satisfaction or pleasure one gets from consuming a product that is subjective and difficult to quantify. |
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Term
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Definition
| The total amount of pleasure or satisfaction a person derives from consuming some specific quantity. Total utility increases at a diminishing rate. |
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Term
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Definition
| The extra satisfaction a consumer realizes from an additional unit of that prodcut. Marginal utility decreases with increased consumption. |
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Term
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Definition
| Economic assumption that consumers are rational individuals seeking to use money in such a manner that maximizes their total utility and allows them to derive the greatest amount of satisfaction. |
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Term
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Definition
| A fixed amount of income that limits how much a good the consumer is able to purchased |
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Term
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Definition
| States that consumers should maximize satisfaction by allocating money income so that the lat dollar spent on each product yields the same amount of marginal utility. |
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Term
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Definition
| Occurs when consumer reaches ideal marginal utility as there is no incentive to altering the expenditure pattern. |
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Term
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Definition
| The branch of economics which combines insights from economics, psychology, and neuroscience to better understand those situations in which actual choice behavior deviates from the predictions made by earlier theories, which incorrectly conclude consumers are always rational beings. |
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Term
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Definition
| Consumers' current situation from which they judge relative gains and losses. |
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Term
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Definition
| For loses and gains near the status quo, losses are felt much more intensely than gains |
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Term
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Definition
| Behavioral economic theory that postulates people make decisions on the potential value of gains and losses rather than the final outcome as utility theory promotes. |
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Term
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Definition
| Changes in people's preferences that are caused by new information which alters the frame of mind used to define whether situations are gains or losses. |
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Term
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Definition
| Pehnomenon in which irrelevant information and numerical values can unconsciously influence people's feelings about the status quo. |
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Term
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Definition
| Irrational behavior in which people only look at their consumption options in isolation rather than considering all choices simultaneously. |
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Term
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Definition
| Tendency of people to put higher valuation on anything that they currently own than on identical items that they do not possess but might purchase. |
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Term
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Definition
| Allows for the precise quantification of the marginal utilities upon whihc utility-maximizing rule depends but is difficult to measure. |
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Term
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Definition
| Allows for easier analysis of consumer's behavior by simply requiring them to rank various combinations of goods in terms of preference. |
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Term
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Definition
| Schedule or curve showing various combinations of two products a consumer can purchase with a given income. |
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Term
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Definition
| Reflects "subjective" information by showing the combinations of two products that will yield the same total satisfcation or total utility to the consumer. Curves are downsliping because more of one product means less of antoher to conserve the total utility. |
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Term
| Marginal Rate of Substitution (MRS) |
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Definition
| The rate at which the consumer who possesses the combination must substitute one good for the other good. This is reflected in the convexity of the curve to the origin as MRS is diminishing. |
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Term
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Definition
| A whole series of indifference curves in which each curve shows differing levels of total utility that never intersect. Each successive curve away from the origin represents increasing utility. |
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Term
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Definition
| The optimal attainable combination of products A and B that occurs at the intersection of the farthest indifference curve and budget line. |
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