Chapter 4: Supply and Demand: Applications and Extensions

Question 1

Resource market

Answer 1

The market for inputs used to produce goods and services.

Question 2

Price controls

Answer 2

Government-mandated prices that are generally imposed in the form of maximum or minimum legal prices.

Question 3

Price ceiling

Answer 3

A legally established maximum price sellers can charge for a good or service.

Question 4

Shortage

Answer 4

A condition in which the amount of a good offered for sale by producers is less than the amount demanded by buyers at the existing price. An increase in price would eliminate the shortage.

Question 5

Price floor

Answer 5

A legally established minimum price buyers must pay for a good or resource.

Question 6

Surplus

Answer 6

A condition in which the amount of a good offered for sale by producers is greater than the amount that buyers will purchase at the existing price. A decline in the price would eliminate the surplus.

Question 7

Minimum wage

Answer 7

Legislation requiring that workers be paid at least the stated minimum hourly rate of pay.

Question 8

Black market

Answer 8

A market that operates outside the legal system in which either illegal goods are sold or legal goods are sold at illegal prices or terms.

Question 9

Tax incidence

Answer 9

The way the burden of a tax is distributed among economic units (consumers, producers, employees, employers, and so on). The actual tax burden does not always fall on those who are statutorily assigned to pay the tax.

Question 10

Tax base

Answer 10

The level or quantity of an economic activity that is taxed. Higher tax rates reduce the level of the tax base because they make the activity less attractive.

Question 11

Tax rate

Answer 11

The per-unit amount of the tax or percentage rate at which the economic activity is taxed.

Question 12

Deadweight loss

Answer 12

The loss or gains from trade to buyers and sellers that occurs when a tax is imposed. The deadweight loss imposes a burden on the buyers and sellers over and above the actual payment of the tax.

Question 13

Excess burden of taxation

Answer 13

Another term for deadweight loss. It reflects losses that occur when beneficial activities are forgone because they are taxed.

Question 14

Average tax rate (ATR)

Answer 14

Tax liability divided by taxable income. It is the percentage of income paid in taxes.

Question 15

Progressive tax

Answer 15

A tax in which the average tax rate rises with income. People with higher incomes will pay a higher percentage of their income in taxes.

Question 16

Proportional tax

Answer 16

A tax in which the average tax rate is the same at all income levels. Everyone pays the same percentage of income in taxes.

Question 17

Regressive tax

Answer 17

A tax in which the average tax rate falls with income. People with higher incomes will pay a lower percentage of income in taxes.

Question 18

Marginal tax rate (MTR)

Answer 18

The additional tax liability a person faces divided by his or her additional taxable income. It is the percentage of an extra dollar of income earned that must be paid in taxes. It is the marginal tax rate that is relevant in personal decision-making.

Question 19

Laffer curve

Answer 19

A curve illustrating the relationship between the tax rate and tax revenues. Tax revenues will be low at both very high and very low tax rates. When tax rates are quite high, lowering them can increase tax revenue.

Question 20

Subsidy

Answer 20

A payment the government makes to either the buyer or the seller, usually on a per-unit basis, when a good or service is purchase or sold.