Glossary
Consumer surplus
The difference between the maximum price consumers are willing to pay for a good and the actual price they pay.
Example:
If you were willing to pay 30, your consumer surplus for that ticket is $20.
Deadweight loss
The reduction in total surplus (consumer plus producer surplus) that results from a market distortion, such as a tax or price control.
Example:
An inefficient tax on a popular video game could create deadweight loss, meaning some mutually beneficial trades no longer occur, reducing overall economic welfare.
Elasticity
A measure of the responsiveness of quantity demanded or quantity supplied to a change in price or other market factors.
Example:
If the demand for a luxury car is highly elastic, a small price increase will lead to a significant drop in sales, demonstrating its high elasticity.
Excise tax
A per-unit tax levied by the government on the production or sale of a specific good or service.
Example:
A government might impose an excise tax on cigarettes to discourage smoking and generate revenue for public health initiatives.
Lump-sum tax
A fixed amount of tax imposed on an individual or firm, regardless of their income or the quantity of goods produced.
Example:
A small business might have to pay a fixed annual lump-sum tax for its operating license, irrespective of its sales volume.
Market
A place or system where buyers and sellers interact to exchange goods and services.
Example:
The online marketplace where you buy your favorite video games is a market connecting gamers and developers.
Minimum wage
A specific type of price floor applied to labor, setting the lowest hourly rate an employer can legally pay workers.
Example:
An increase in the minimum wage could lead to higher incomes for some low-skilled workers but potentially fewer entry-level jobs available.
Price ceiling
A maximum legal price that can be charged for a good or service, set by the government.
Example:
If the government sets a price ceiling on bread below its equilibrium price, bakeries might struggle to cover costs, leading to less bread available.
Price controls
Government-mandated legal minimum or maximum prices set for specific goods or services.
Example:
Governments might implement price controls on essential medicines to ensure affordability for all citizens.
Price floor
A minimum legal price that can be charged for a good or service, set by the government.
Example:
A price floor on agricultural products might be implemented to ensure farmers receive a stable income, even if it means higher food prices for consumers.
Producer surplus
The difference between the price producers receive for a good and the minimum price they would have been willing to accept.
Example:
A farmer who sells their corn for 2, earns a producer surplus of $2 per bushel.
Rent control
A specific type of price ceiling applied to rental housing, limiting the amount landlords can charge for rent.
Example:
In cities with strict rent control, finding an affordable apartment can be incredibly difficult due to the resulting housing shortage.
Shortage
A market condition where the quantity demanded of a good or service exceeds the quantity supplied at a given price.
Example:
After a popular new gaming console was released, stores experienced a shortage as demand far outstripped the available supply.
Surplus
A market condition where the quantity supplied of a good or service exceeds the quantity demanded at a given price.
Example:
If a new smartphone model doesn't sell as well as expected, retailers might end up with a surplus of unsold inventory.
Tax incidence
The division of the burden of a tax between buyers and sellers in a market.
Example:
Understanding tax incidence helps economists determine whether consumers or producers bear more of the cost of a new sales tax on luxury cars.
Tax revenue
The total amount of money collected by the government from a tax, calculated as the tax per unit multiplied by the quantity sold after the tax.
Example:
If a 10 million in tax revenue.
Taxes
Compulsory financial contributions levied by a government on individuals or businesses to fund public expenditures.
Example:
The government uses taxes collected from citizens to fund public services like roads, schools, and healthcare.