week 4

Question 1

market demand

Answer 1

demand of a representative consumer who has an income that is just the sum of all the individual incomes

Question 2

representative consumer

Answer 2

if the market behavior of an aggregate of different consumers is as if it were the market behavior of a number of identical hypothetical consumers, each with the same level of income.

Question 3

aggregate demand

Answer 3

the total demand for all finished goods and services produced in an economy

Question 4

discrete goods

Answer 4

those which are consumed in whole numbers and not in fractions

Question 5

linear demand curves

Answer 5

a straight-line relationship between the price and quantity demanded

Question 6

elasticity

Answer 6

an economic measure of the sensitivity of demand relative to a change in another variable: The percent change in quantity divided by the percent change in price

Question 7

elastic demand

Answer 7

If a good has an elasticity of demand greater than 1 in absolute value

Question 8

inelastic demand

Answer 8

If the elasticity is less than 1 in absolute value

Question 9

close substitutes

Answer 9

similar products that target the same customer groups and satisfy the same needs, but have slight differences in characteristics

Question 10

income elasticity of demand

Answer 10

used to describe how the quantity
demanded responds to a change in income

Question 11

normal good

Answer 11

is one for which an increase in income leads to an increase in demand
→ The income elasticity of demand is positive

Question 12

inferior good

Answer 12

s one for which an increase in income leads to a decrease in demand
→ The income elasticity of demand is negative

Question 13

luxury good

Answer 13

s one for which the income elasticity is positive and larger than 1
→ A one percent increase in income leads to more than a one percent increase in the demand for a luxury good

Question 14

market supply curve

Answer 14

the sum of the individual supply curves

Question 15

optimization principle

Answer 15

people choose their consumption optimally from their budget sets;
Firms select the amount of output to produce to maximize profits;
The demand and supply curves represent the optimal choices of the agents involved.

Question 16

equilibrium principle

Answer 16

we combine the behavior of consumers and firms to study the outcomes of their interaction in the market

Question 17

market equilibrium

Answer 17

occurs when market supply equals market demand

Question 18

equilibrium price

Answer 18

the price where the supply of the good equals the demand

Question 19

excess supply

Answer 19

the price rises

Question 20

excess demand

Answer 20

the price lowers

Question 21

perfectly inelastic supply

Answer 21

fixed supply; eq. quantity is determined by the supply conditions; eq. price is determined entirely by demand conditions

Question 22

perfectly elastic supply

Answer 22

quantity supplied is extremely sensitive to the price; eq. price is determined by the supply conditions; eq. quantity is determined entirely by demand conditions

Question 23

demand shift

Answer 23

if the demand curve shifts to the right, eq. price and quantity must both rice and vice versa

Question 24

supply shift

Answer 24

if the supply curve shifts to the right eq. price decreases and eq. quantity decreases and vice versa

Question 25

quantity tax

Answer 25

tax levied per unit of quantity bought or sold

Question 26

value tax

Answer 26

ax expressed in percentage unit, like VAT

Question 27

passing along a tax: perfectly elastic supply

Answer 27

Industry has a horizontal supply curve
→ The industry will supply any amount desired of the good at some given price, and zero units of the good at any lower price
→ Price is determined by the supply and quantity by the demand curve

Question 28

passing along a tax: perfectly inelastic supply

Answer 28

industry has a vertical supply curve
→ The quantity of the good is fixed
→ Price is determined by the demand

Question 29

monetary equivalent of the utility

Answer 29

consuming n units of a good is the sum of the consumer’s reservation prices

Question 30

gross consumer’s surplus

Answer 30

The utility from consuming n units of the discrete good is just the area of the first n bars which make up the demand function

Question 31

net consumer’s surplus

Answer 31

The final utility of the consumer depends also on how much of all the other goods the consumer can buy

Question 32

consumer’s surplus

Answer 32

difference between the price the consumer pays on the market for a given good and the highest price she would be willing to pay for that good

Question 33

consumers’ surplus

Answer 33

equals the sum of surpluses across a number of consumers

Question 34

continuous demand

Answer 34

The triangular area under the continuous demand curve is then approximately equal to the consumer surplus

Question 35

changes in the consumer’s surplus (CS)

Answer 35

results from the implementation of some economic policy

Question 36

producer’s surplus (PS)

Answer 36

the difference between the price for which a producer would be willing to provide a good and the actual price at which the good is sold

Question 37

net producer’s surplus

Answer 37

the difference between the min price a firm would be willing to sell its product for and the price it sells it for

Question 38

changes in producer’s surplus

Answer 38

the difference in the increased price and the min price, which increases the PS

Question 39

social surplus (S)

Answer 39

the total gain to both consumers and producers by adding together consumer surplus and producer surplus

Question 40

the real social cost of the tax

Answer 40

the difference between the value of the lost output and the revenue collected with the tax

Question 41

deadweight loss of the tax

Answer 41

the lost value to the consumers and producers due to the reduction in the sales of the good
→ You cannot tax what is not produced and sold