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Flashcards in Demand And Supply Deck (38):
1

Law of Demand

When the price goes up, the quantity demanded goes down

2

Quantity Demanded

The amount of a good that a given individual or group of individuals will choose to consume at a given price

3

What is demand?

A family of numbers that lists the quantity demanded corresponding to each hypothetical price

4

What is supply?

A family of numbers giving the quantities supplied at each price

5

Quantity Supplied

The amount of a goods that suppliers will provide at a given price

6

Law of Supply

When the price of a good goes up, the quantity supplied goes up

7

Market Equilibrium

The price at which quantity supplied equals quantity demanded.

This is illustrated by intersecting supply and demand curves

It is also illustrated in the real world because both demanded and suppliers are satisfied aimed there is neither excess demand nor excess supply

8

Benefit of Market Equilibrium

There are no unconsummated wealth-creating transactions. In other words, everyone is satisfied with their transactions.

The market has identified high-value buyers (people that want the good more than what they will trade for it) and low-value sellers (people who value their good lower than that which they will receive in return) brought them together, and set a price at which they can exchange goods.

9

Sales Tax

A per unit tax that is paid directly by consumers to the government

10

Excise Tax

A tax that is paid directly by suppliers to the government

11

Demand shift

A sales tax (consumer tax) shifts the demand curve down meaning that there is less quantity demanded?

12

Supply Shift

An excise tax (producer tax) shifts the supply up.

This increases the cost at which a supplier can sell a good

13

Legal Incidence

The division of a tax burden that according to who is required under the law to pay the tax (who pays the bill?). Consumer (sales tax) or producer (excise tax).

14

Economic Incidence

Division of a tax burden according to who actually incurs the costs of a tax. Consumer (Pd - P*) or producer (P* - Ps)

15

Tax Incidence

The economic incidence of a tax is independent of its legal incidence

16

Price Elasticity

Describes how the quantity of demand/supply react to price changes.

17

Evaluate Economic Policies

How do we evaluate gains from trade?

1. Measure Value of exchange

2. Create a criterion that allows us to compare alternative policies according to this value

18

Social/Welfare Gain

The sum of consumer and producer surplus serves as the value of exchange

19

Efficiency Criterion

Compare
Marginal Value

Total value (idea)

Total value (geometry)

20

Marginal Value

The maximum amount a consumer would be willing to pay to acquire one additional item,

21

Total Value

The maximum amount a consumer would be willing to pay to acquire the given quantity of items

22

Total Value Geometry

The total value of the consumers purchases is equal to the area under the demand curve out to the quantity demanded

23

Efficiency Criterion

A normative criterion according to which your votes are weighed according to your willingness to pay for your preferred outcome. (majority rule with weighed votes). The highest-welfare outcome is preferred.

24

Deadweight Loss

A reduction in social gains

25

Deadweight Loss of a Tax

The deadweight loss of a tax is equal to the unmaterialized social gains from trade

26

Deadweight Loss of a Subsidy

Equal to the social losses from too much trade

27

Price Controls

The maximum price (ceiling) or minimum price (floor) for a good

28

What do Price Control do?

Affects the quantity traded/equilibrium price/social gains losses

29

Social Loss from Price Controls

Insufficient quantity traded and potential wasteful use of resources by high-valuation demanders (bid wars)

30

World Price

Price of a good that prevails in the world market for that good. Pw

31

Domestic Price

The equilibrium price in a closed economy P*

32

SMOPEC

Small Open Economy: price taker in the world economy (its trade policy does not affect the world price of goods).

33

Tariff

Tax on goods produced abroad and sold domestically

34

Legal Tax Incidence

Because world supply is perfectly elastic, the consumer bears the entire economic burden of the tariff, irrespective of its legal incidence. Consumer price equals Pw plus the tariff.

35

Benefits of International Trade

Increased variety of goods / lower cost through economies of scale / increased competition / enhanced flow of ideas

36

Marginal Cost

The minimum amount for which a producer is willing to sell/produce one additional item

37

Total Cost

The minimum amount for which a producer is willing to sell/ produce a given quantity of items

38

Total Cost

The total cost of the producer's sales is equal to the area under the supply curve out to the quantity demanded