Ledyard's ECO304K Final Exam
Terms
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- Absolute advantage
- the ability to produce more of a good in a given amount of time.
- Comparative advantage:
- The ability to produce a good with a lower opportunity cost
- Opportunity cost:
- How much of one good you have to give up to produce a unit of the other good.
- Demand:
- A graph of the relationship between price and quantity demanded.
- Quantity supplied:
- the amount of a good that sellers are willing and able to sell at a given price.
- Supply:
- A graph of the relationship between price an quantity supplied.
- Inferior good:
- a good for which, all else equal, a fall in income leads to an increase in demand
- Normal good:
- a good for which, all else equal, a fall in income leads to a decrease in demand
- Substitutes:
- two goods for which an increase in the price of one leads to an increase in the demand for the other.
- Compliments:
- two goods for which an increase in the price of one leads to a decrease in the demand for the other.
- Perfect Substitutes:
- two goods that can be substituted for each other in a specific ratio (straight line indifference curves.)
- Perfect Compliments:
- two goods which must be consumed in a specific ratio together (right angle indifference curves)
- Equilibrium:
- a price (P*) and quantity (Q*) such the QS = QD = Q*.
- Budget Constraint (BC)
- the limit on the consumption bundles that a consumer can afford.
- Indifference Curves (IC)
- A curve that shows the consumption bundles that give the consumer the same level of satisfaction.
- Marginal Rate of Substitution
- The rate at which a consumer is willing to trade one good for another and stay on the same indifference curve.
- Income effect
- The change in consumption that results when a price change moves a consumer to a higher or lower indifference curve.
- Substitution effect
- The change in consumption that results when a price change moves a consumer to a new point on the same indifference curve to a new Marginal rate of substitution.
- Consumer Surplus:
- a buyer’s willingness to pay minus the amount the buyer actually pays
- Producer Surplus:
- the amount a seller is paid minus the seller’s costs.
- Efficiency:
- The property of a resource allocation of maximizing total surplus received by all members of society.
- Equity:
- The fairness of the distribution of well-being among the members of society.
- Price elasticity of demand
- A measure of the responsiveness of quantity demanded to changes in price
- Price elasticity of supply
- A measure of the responsiveness of quantity supplied to changes in price
- Income elasticity of demand
- A measure of the responsiveness of quantity demanded to changes in income
- Cross price elasticity of demand
- A measure of the responsiveness of quantity demanded of one good to changes in price of another good
- Price Ceiling
- A legal maximum on a price that can be charged in the market
- Price Floor
- A legal minimum on the price that can be charged in the market
- Tax burden
- The difference in price that a buyer pays or a seller receives before and after a tax.
- World Price
- The price of a good that prevails in the world market for that good. (Also known as free trade price.)
- Tariff
- A tax on goods produced abroad and sold domestically.