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