M2 - Definitions Flashcards
Surplus
Difference between money received and opp cost of selling that good
Producer surplus
Benefits sellers receive from being able to sell a good
Consumer surplus
The net benefit obtained by a consumer when they pay less than what they would’ve been willing to pay
Total consumer surplus
Sum of individual consumer surpluses
(Same for producer)
Sellers cost
The lowest price at which a potential seller is willing to sell
(incl. monetary and opp cost)
Total Surplus in a market
Sum of consumer and producer surplus
Equity vs Efficiency
Efficiency = HOW to achieve goals
Equity = Goals to increase fairness
Property rights
A system in which valuable items in the economy have specific owners who can dispose of them as they choose
Economic signals
Any piece of information that helps people and buisnesses make better economic decisions
Market for lemons
Market in which prices don’t work as economic signals
Market power
When a single firm has the ability to rise market price ie holds great power over the market
Market intervention
Policy imposed by the government to prevail over the market forces of supply and demand
Price Controls
Price ceiling
Price floor
Government interventions to regulate prices
upper limit
lower limit
Dead weight loss
The lost surplus associated with the transactions that no longer occur due to market intervention
Misallocation of goods
Giving goods to those who aren’t necessarily desperate for them
Elasticity
The responsiveness of one economic variable to changes in another variable
Price elasticity for demand
Ratio of the percent change in quantity demanded to the percentage change in price as we move along the demand curve
Elastic
Responsive to change in one variable
Inelastic
Non-responsive or unproportional response
Total Revenue
Price x Quantity sold
Price Effect
More revenue raised since selling price is higher
Quantity effect
Fewer units sold bc of a higher price which leads to a lower revenue
Cross-price elasticity of demand
How much demand for a good is affected by the price of other goods
Income elasticity of demand
How demand is affected by changes in income
Income-elastic normal good
When income rises, demand for this good rises FASTER than income ie, luxury items
Income-inelastic normal good
When income rises the demand rises slower than the income ie, food and clothing
Price elasticity of supply
Responsiveness in the quantity of output supplied for a higher price
Excise tax
Tax charged on each unit of a good or service that is sold. Implemented on producers but affects consumers as well
Net price of tax
Pp = Pc - T
Tax rates
The amount of tax levied per unit of the taxed item (can be defined as $ or %)
Administrative costs of the tax
The resources used for its collection, for the method of payment and for punishment of any attempts to evade the law
Benefits principle
Those who benefit from public spending should bear the burden of the tax that pays for that spending
Ability to pay principle
Those with greater ability to pay taxes should pay more
Lump-sum tax
Tax that is the same regardless of any actions people take
Base of a tax
Measure or value determining how much the individual pays (Usually $)
Structure of a tax
How the tax depends on the tax base. Usually %
Income Tax
Dependent on income of an individual or family from wages/invests
Payroll Tax
Tax depends on the earnings an employer pays to employee
Sales tax
Depends on the value of goods sold (excise tax)
Profits Tax
Tax that depends on a firm’s profits (corporate income tax)
Property Tax
Tax that depends on the value of property
Wealth Tax
Tax that depends on an individual’s wealth
Proportional tax
Same percentage of the base regardless of taxpayer’s income, wealth or assets
Progressive tax
Rises more than in proportion to income
(More % more tax)
Regressive Tax
Rises less than in proportion to income
(More $ less tax)
Marginal tax rate
% of an increase in income that is taxed away
