Vocab and Definitions
This is the difference between what a buyer is willing to pay and what they actually pay.
What is consumer surplus?
If the price of a substitute increases, demand for the original good will do this.
What is increase?
If price rises 10% and quantity demanded falls 5%, demand is…
What is inelastic?
A binding price floor always results in this market outcome.
What is a surplus?
If supply increases, equilibrium price will __________ and quantity will __________.
Decrease; increase.
A legal maximum price set below equilibrium.
What is a price ceiling?
If the price of leather (an input) rises, the football market experiences this shift.
What is a leftward shift of supply?
The formula for price elasticity of demand.
What is percent change in Qd divided by percent change in price?
When a binding price floor is placed on the labor market (like minimum wage), what happens to employment?
Employment decreases because quantity supplied of labor exceeds quantity demanded, creating a surplus of labor (unemployment).
A price ceiling below equilibrium creates this.
A shortage.
A per-unit tax placed on the sale of a specific good.
What is an excise tax?
When consumers expect higher prices in the future, today’s demand does this.
What is shifts right?
If the price of Good X rises 10% and quantity demanded of Good Y rises 20%, the cross-price elasticity sign and relationship.
Positive; substitutes.
The price buyers pay after a tax is imposed is called this.
What is Pc (price paid by consumers)?
Domestic producers gain, domestic consumers lose, and deadweight loss forms when this trade policy is used.
A tariff.
A good for which demand increases when income increases.
What is a normal good?
If production costs fall due to new technology, what happens to equilibrium price and quantity?
Price falls, quantity rises.
On a linear demand curve, elasticity is greatest near this part of the curve.
The top (higher prices, lower quantities).
The tax wedge represents the difference between these two prices.
Price buyers pay (Pc) and price sellers receive (Ps).
If an excise tax is placed on sellers, the supply curve shifts in this direction.
left.
The loss of total surplus created by market interventions like taxes or price controls.
What is deadweight loss?
A cold summer kills bees, reducing honey production. Identify the curve that shifts and the direction.
Supply shifts left.
If Es = 2 and price rises 8%, what happens to quantity supplied?
It increases by 16%.
Explain who pays more of the tax when demand is more inelastic than supply.
Consumers bear more of the tax burden.
A binding price ceiling is placed on a market. Explain how it affects:
The quantity demanded
The quantity supplied
The size of consumer surplus
Quantity demanded increases because the price is artificially low.
Quantity supplied decreases because producers don’t want to sell at the lower price.
Consumer surplus increases for the consumers who can actually buy, but many consumers are left without the product.