Microeconomics Exam #2: Chapters 5-8

the difference between the maximum price consumers are willing and able to pay for a good or service and the price they actually pay.
Ex. If a $40 pair of pants is on sale for $30, you'd receive $10 in consumer surplus.

a branch of economics that focuses on measuring the welfare of market participants and how changes in the market change their well-being.

the difference between the price producers receive for a good or service and the minimum price they are willing and able to accept.
Ex. If you want to sell your used car for $2,000 and someone buys it for $2,500, you received producer surplus of $500.

the sum of consumer and producer surplus; a measure of the total welfare, or wealth, that trade creates for consumers and producers in a market; aka "social welfare" or "total surplus".

the value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium.

producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a good or service.

producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost.

a measure of how responsive one variable is to a change in another variable; percentage change in quantity divided by percentage change in price.

a measure of how responsive quantity demanded is to a change in price; percentage change in quantity demanded divided by the percentage change in price.
Ex. If E(d) for music downloads is -1.5, then a 1% increase in the price of music downloads should lead to a 1.5% decrease in the quantity of music downloaded.

price elasticity of demand greater than 1 in absolute value; Q(d) is more responsive to change in price. If price changes by 1%, Q(d) changes by more than 1%.

price elasticity of demand less than 1 in absolute value; Q(d) is less responsive to change in price. If price changes by 1%, Q(d) changes by less than 1%.

price elasticity of demand equal to 1 in absolute value. If price changes by 1%, Q(d) changes by 1%.

infinite price elasticity of demand; Q(d) is very responsive to change in price. If price increases or decreases by 1%, Q(d) decreases to zero.

price elasticity of demand equal to zero; Q(d) is completely nonresponsive to price changes. If price increases or decreases, Q(d) is unchanged.

Price X Quantity = P X Q

If demand is ______, a reduction in price has a relatively large effect on the quantity demanded, so total revenue __________. On the other hand, an ________ in price results in a __________ in total revenue.

If demand is ________, reducing price has a relatively small effect on the quantity demanded, so total revenue actually _________. When demand is inelastic, ________ price will actually _________ the firm's total revenue.

a measure of the effect of a change in price of one product on the Q(d) of another; percentage change in the Q(d) in one good divided by the percentage change in the price of another good. When goods are substitutes, their elasticity of demand is positive.

a measure of how responsive demand is to a change in consumer income; percentage change in Q(d) by the percentage change in income.

a good for which there is a direct relationship between the demand for the good and income; a good with a positive income elasticity of demand.

a good for which there is an inverse relationship between the demand for the good and income; a good with a negative income elasticity of demand.

a measure of how responsive quantity supplied is to a change in price; percentage change in Q(s) divided by percentage change in price.

price elasticity of supply greater than 1; Q(s) is more responsive to a change in price. If price changes by 1%, Q(s) changed by more than 1%.

price elasticity of supply less than 1; Q(s) is less responsive to change in price. If price changes by 1%, Q(s) changes by less than 1%.

price elasticity of supply equal to 1; prices and Q(s) change by equal percentages. If price changes by 1%, Q(s) changes by 1%.

infinite price elasticity of supply; Q(s) is so responsive to change in price. If price increases or decreases by 1%, Q(s) decreases to zero.

price elasticity of supply equal to zero; Q(s) is completely nonresponsive to price changes. If price increases or decreases, Q(s) is unchanged.

the time period in which producers cannot increase their use of economic resources to increase quantity supplied.

the time period in which at least one input of production is fixed by other inputs can be changed.
Ex. hiring more employees to use more dough to make more bread.

the time period in which all inputs of production can be changed.
Ex. buying a larger oven to increase bread production.

a market in which the demand and supply curves represent the benefits and costs to only the consumers and producers in the market.

the cost to the producer of an additional unit of a good or service.

the benefit to the consumer of an additional unit of a good or service.

the cost of an additional unit of a good or service that is imposed on people other than the producer.

the benefit of an additional unit of a good or service that is enjoyed by people other than the direct consumer of the good or service.

the benefit enjoyed by or cost imposed on a third party not directly involved in the production or consumption of a good or service.

the cost to society of producing and addition unit of a good or service; the sum of private MC and external MC.

the full benefit to society of consuming an additional unit of a good or service; the sum of private MB and external MB.

the level of production and consumption of a good or service such that the marginal social benefit is equal to the marginal social cost.

the unpaid benefit enjoyed by a third party not directly involved in the production or consumption of a good or service.
Ex. walking past a baker and smelling fresh-baked bead.

the demand for a good or service that considers only the private benefits of its consumption.

the demand for a good or service that reflects both the private and external benefits of its consumption.

the uncompensated cost imposed on a third party not directly involved in the production or consumption of a good or service.
Ex. living near a large factory that emits lots of noise and bad odors.

the characteristic of some goods and services whereby the consumption of the good or service by one person reduces the quantity available for consumption by others.

the characteristic of some goods or services whereby the consumption of the good or service by one person does not diminish the amount available to someone else.

a characteristic of some goods or services whereby people people can be prevented, or excluded, from consuming the good or service.
Ex. firms can prevent people from consuming their products unless they pay for the right to do so.

a characteristic of some goods or services whereby people cannot easily be prevented from consuming the the good or service, even if they don't pay for it.
Ex. a fireworks display

any good or service that is rival and exludable

any good or service that is both nonrival and nonexludable

the satisfaction or happiness received from the consumption of good and services.

the total satisfaction or happiness received from the consumption of a good, service, or combination of goods and services.

the additional satisfaction or happiness received from the consumption of an additional unit of a good or service.
Ex. consuming another slice of pizza at a local sports event

a subjective measure of the utility associated with consuming a good or service.

a principle in economics that states that the marginal utility associated with consumption of good or service becomes smaller with each extra unit that is consumed in a given time period.

the process of obtaining the greatest level of overall satisfaction or happiness from consuming goods and services, subject to consumers' preferences, incomes, and prices.

the idea that consumers maximize their utility when they allocate their limited incomes so that the marginal utility per dollar spent on each of their final choices in a bundles is equal.