MICROECON SECTION 3
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44 terms
Terms | Definitions |
|---|---|
 What is the substitution effect of a price in a good? | the change in the quantity of that good demanded as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive |
| What is the income effect of a change in the price of a good? | the change in the quantity of that good demanded that results from a change in the consumers purchasing power when the price of the good changes |
| What is the price elasticity of demand? | the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve |
| What is the midpoint method? | a technique for calculating the percent change, done by calculating changes in a variable compared with the average or midpoint of the initial and final values |
| When is demand perfectly inelastic? | when the quantity demanded does not respond at all to changes in the price. it is in a vertical line |
| When is demand perfectly elastic? | when any price increase will cause the quantity demanded to drop to zero. the demand curve is a horizontal line. |
| When is demand elastic? | if the price elasticity of demand is greater than one |
| When is demand inelastic? | if the price of demand is less than one |
| When is demand unit-elastic? | if the price elasticity of demand is exactly one |
| What is total revenue? | the total value of sales of a good or service. it is equal to the price multiplied by the quantity sold |
| What does the cross price elasticity of demand measure? page 119 | it measures the effect of the change in one good's price on the quantity demanded of the other good. |
| What is the income elasticity of demand? | the percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in the consumer's income |
| When is the demand for a good income elastic? | if the income elasticity of demand for that good is greater than one |
| when is the demand for a good income in-elastic? | if the income elasticity of demand for that good is positive but less than one |
| What is the price elasticity of supply? page 121 | a measure of the responsiveness of the quantity of a good supplied to the price of that good. |
| When is there perfectly inelastic supply? | when the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied. it is a vertical line. |
| When is there a perfectly elastic supply? | if the quantity supplied is zero below some price and infinite above that price. has a horizontal line |
| What is a consumer's willingness to pay for a good? | the maximum price at which he or she would buy that good |
| What is individual consumer surplus? | the net gain to an individual buyer from the purchase of a good |
| what is total consumer surplus? | the sum of the individual consumer surpluses of all the buyers of a good in a market |
| What is the term consumer surplus used to refer to? | both individual and to total consumer surplus |
| What is a seller's cost? | the lowest price at which he or she is willing to sell a good |
| What is individual producer surplus? | the net gain to an individual seller form selling a good. |
| What is total producer surplus in a market? | the sum of the individual producer surpluses of all the sellers of a good in a market. |
| What is total surplus? | the total net gain to consumers and producers from trading in a market |
| A progressive tax... | rises more than in proportion to income |
| A regressive tax... | rises less than in proportion to income |
| A proportional tax... | rises in proportion to income |
| An excise tax... | is a tax on sales of a particular good or service |
| What is tax incidence? | the distribution of the tax burden |
| What is the deadweight loss from a tax? | the decrease in total surplus resulting from the tax, minus the tax revenues generated |
| What are the administrative costs of a tax? | they are the resources used by government to collect the tax, and by taxpayers to pay it over and above the amount collected |
| What is a lump sum tax? | a tax of a fixed amount paid by all taxpayers |
| What is utility? | a measure of personal satisfaction |
| What is a u util? | a unit of utility |
| What is the marginal utility of a good or service? | the change in total utility generated by consuming one additional unit of that good or service |
| What does the marginal utility curve show? | how marginal utility depends on the quantity of a good or service consumed |
| What is the principle of diminishing marginal utility? | each successive unit of a good or service consumed adds less to total utility than does the previous unit |
| What does a budget constraint limit? | the cost of a consumers consumption bundle to no more than the consumers income |
| What are a consumers consumption possibilities? | the set of all consumption bundles that are affordable, given the consumers income and prevailing prices |
| What does a consumers budget line show? | the consumption bundles available to a consumer who spends all of his or her income |
| What is a consumers optimal consumption bundle? | the consumption bundle that maximizes the consumers total utility given his or her budget constraint |
| What is the marginal utility per dollar spent? | on a good or service is the additional utility from spending one more dollar on that good or service |
| What is the optimal consumption rule? | in order to maximize utility, a consumer must equate the marginal utility per dollar spent on each good and service in the consumption bundle |
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