Elasticity & Markets
The responsiveness of quantity demanded to a change in price.
What is Price Elasticity of Demand (PED)?
A market with many buyers and sellers, homogeneous products, and no barriers to entry.
What is Perfect Competition?
The total value of all final goods and services produced within a country's borders in a year.
What is Gross Domestic Product (GDP)?
When a country can produce a good at a lower opportunity cost than another country.
What is Comparative Advantage?
The three pillars of the Human Development Index (HDI).
What are health (life expectancy), education (mean/expected years of schooling), and standard of living (GNI per capita)?
A good for which demand decreases as consumer income rises, resulting in a negative Income Elasticity of Demand (YED < 0).
What is an inferior good?
The point where a firm maximizes its profits (MC = MR).
What is the profit-maximization rule?
Unemployment caused by a mismatch between worker skills and available jobs.
What is structural unemployment?
A tax imposed on imported goods to protect domestic industries.
What is a tariff?
A curve that shows the degree of income inequality in an economy.
What is the Lorenz Curve?
This occurs when the social benefit of a good exceeds the private benefit.
What is a positive externality of consumption?
The output level where a firm produces such that Marginal Revenue is zero (MR = 0), often pursued to gain market share.
What is revenue maximization?
The formula used to calculate the simple Keynesian Multiplier.
What is k = 1/(1 - MPC) or k = 1/(MPW)?
A record of all economic transactions between residents of a country and the rest of the world.
What is the Balance of Payments?
This occurs when a transaction affects a third party who is not involved in the activity.
What is an externality?
A good with an Income Elasticity (YED) greater than 1.
What is a luxury good?
The type of efficiency achieved when P = MC.
What is Allocative Efficiency?
The phenomenon where government borrowing increases interest rates, reducing private investment.
What is "Crowding Out"?
Policies such as tariffs, quotas, or a deliberate devaluation of the currency, specifically designed to shift domestic spending away from imports and toward domestically produced goods.
What are expenditure-switching policies?
A policy where the government sets a limit on pollution and issues tradable permits to firms.
What is Cap-and-Trade (or Carbon Credits)?
The specific area on a supply and demand diagram representing the loss of total welfare when a market is distorted from its competitive equilibrium, such as by a tax or monopoly power.
What is Deadweight Loss (or Welfare Loss)?
A market situation where AR < ATC but AR > AVC in the short run.
What is the condition where a firm stays open in the short run despite making a loss? (The "Shut-down" rule context).
The diagram showing the relationship between the rate of inflation and the rate of unemployment.
What is the Phillips Curve?
This occurs when a country joins a customs union and shifts production from a lower-cost non-member to a higher-cost member.
What is Trade Diversion?
The "trap" where low income leads to low savings, low investment, and continued low income.
What is the Poverty Trap (or Poverty Cycle)?