Lesson 5 Flashcards
Comparative Statics
Studying how supply and demand curves shift
Increase
Shift to the right
Decrease
Shift to the left
Elasticity
A measure of the responsiveness of one variable
to changes in another variable
Income Elasticity of Demand
The effect that a change in a person’s income has on their demand for a certain good
Normal Good
A good for which demand increases when income increases, and demand decreases when income decreases
Inferior Good
A good for which demand decreases when income increases, and demand increases when income decreases
Cross-Price Elasticity of Demand
The effect that a change in the price of one good has on the demand for another good
Substitutes
Goods that perform a similar function or satisfy a
similar human desire
Complements
Goods that are more valuable when consumed
together
Tax
When the government takes money from you when you engage in a certain activity
Subsidy
When the government gives you money when you engage in a certain activity.
Own-Price Elasticity of Demand
The responsiveness of the quantity demanded for
a good to changes in the price of that good
Inelastic
When the absolute value of a good’s price elasticity of demand is less than 1
Elastic
When the absolute value of a good’s price elasticity of demand is greater than 1
Demand curve
the set of maximum buying prices
Supply curve
the set of minimum selling prices
Consumer Surplus
A measure of the gain that the buyer experiences
from an exchange
Producer Surplus
A measure of the gain that the seller experiences
from an exchange
Total Gain from Trade
The sum of consumer surplus and producer
surplus
Equilibrium
A situation in which no
individual, taking the behavior of all others as
given, wants to change their own behavior
Shortage
When the quantity supplied is
lower than the quantity
demanded
Surplus
When the quantity demanded is
lower than the quantity
supplied
Dead Weight Loss
Gains from trade that are not being made
Economic Efficiency
A situation in which all possible gains from trade are being
made
Entrepreneur
A person who takes advantage of a profit opportunity in the market
