44 terms

Section 9 Behind the Demand Curve: Consumer's Choice

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substitution effect
change in price of a good is 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
income effect
change in the price of a good is the change in the quantity of that good demanded that results form a change in the consumer's purchasing power when the price of the good changes
price elasticity of demand
=%change in quantity demanded over the %change in price
midpoint method
technique for calculating the percent change, changes in a variable compared with the average, or midpoint, of the initial and final values
perfectly inelastic
quantity demanded doesn't respond at all to changes in the price-demand curve is a vertical line
perfectly elastic
any price increase will cause the quantity demanded to drop to zero-demand curve is a horizontal line
elastic
price elasticity of demand is greater than 1
inelastic
price elasticity of demand is less than 1
unit-elastic
price elasticity of demand is exactly 1
total revenue
TR=price x quantity sold
cross-price elasticity of demand
measures the effect of change in one good's price on the quantity demanded of the other good. it is equal to the percent change i the quantity demanded of one good divided by the percent change in the other good's price
income elasticity of demand
percent change in the quantity demanded when a consumer's income changes divided by the percent change in the consumer's
income-elastic
demand for a good, elasticity of demand for the good is greater than 1
income-inelastic
demand for a good, income elasticity of demand for the good is positive but less than 1
price elasticity of supply
measure of the responsiveness of the quantity of a good supplied to the price of that good. ratio of the percent change in quantity supplied over the percent change in the price along the supply curve
perfectly inelastic supply
p.e.s. is zero, changes in price have no effect on the quantity supplied, vertical line
perfectly elastic supply
quantity supplied is zero below some price and intinite above that price, horizontal line
willingness to pay
maximum prive consumer would buy the good
individual consumer surplus
net gain to an individual buyer from the purchase of a good, equal to difference between the buyer's willingness to pay and the price paid
total consumer surplus
sum of the individual consumer surpluses of all the buyers of a good in a market
consumer surplus
refers to both individual and total consumer surplus
cost
lowest price which seller is willing to sell
individual producer surplus
net gain to an individual seller from selling a good, equal to difference between the price received and seller's cost
total producer surplus
sum of the individual producer surpluses of all the sellers of a good in a market
producer surplus
refers to both individual and to total producer surplus
total surplus
total net gain to consumers and producers from trading in a market. sum of producer and consumer surplus
progressive tax
rises more in proportion to income
regressive tax
rises less than in proportion to income
excise tax
tax on sales of a particular good or service
tax incidence
distribution of the tax burden
deadweight loss
from a tax, decrease in total surplus resulting form the tax, minus the tax revenues generated
administrative costs
of a tax are the resources used by government to collect the tax, and by taxpayers to pay (evade) it, over and above the amount collected
lump-sum tax
tax of a fixed amount paid by all taxpayers
utility
measure of personal satisfaction
util
unit of utility
marginal utility
of good or service is the change in total utility generated by consuming one additional unit of that good or service
marginal utility curve
shows how marginal utility depends on the quantity of a good or service consumed
principle of diminishing marginal utility
each successive unit of a good or service consumed adds less to total utility than does the previous unit
budget constraint
limits the cost of a consumer's consumption bundle to no more than the consumer's income
consumption possibilities
consumer's set of all consumption bundles that are affordable, given the consumer's income and prevailing prices
budget line
consumer's show the consumption bundles available to a consumer who spends all of their income
optimal consumption bundle
consumer's consumption bundle that maximizes the consumer's total utility given their budget constraint
marginal utility per dollar
spent on a good or service is the additional utility from speding one more dollar on that good or service
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