Economics Unit 2 Review

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What are complements in economics?

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Complements are goods that are consumed together. An increase in the price of one leads to a decrease in the demand for the other. Example: Peanut butter and jelly.

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What is a price floor?

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A price floor is a minimum price set by the government that consumers must pay for a good or service. It prevents prices from falling below a certain level.

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What is the price elasticity of demand?

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Price elasticity of demand measures how much the quantity demanded of a good responds to a change in the price of that good. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

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What does a tax create in a market?

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A tax creates deadweight loss (DWL), which is the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved.

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What is a substitute good?

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Substitute goods are products that can replace each other. An increase in the price of one leads to an increase in the demand for the other. Example: Butter and margarine.

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What is deadweight loss (DWL)?

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Deadweight loss is the loss of economic efficiency that occurs when the equilibrium outcome is not achievable or not achieved, often due to taxes or subsidies.

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How do you calculate price elasticity of demand?

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Price elasticity of demand = (% Change in Quantity Demanded) / (% Change in Price). For example, if a 2% change in price leads to a 10% change in quantity demanded, the elasticity is 5.

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What is a price ceiling?

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A price ceiling is a maximum price set by the government that can be charged for a good or service. It prevents prices from rising above a certain level.

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What are inferior goods?

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Inferior goods are goods whose demand increases when consumer incomes fall and decreases when incomes rise. Example: Generic brands.

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What is market equilibrium?

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Market equilibrium is the point where the quantity of a good demanded by consumers equals the quantity supplied by producers, resulting in a stable market price.