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Harberger Triangle
In economics, deadweight loss is the difference in production and consumption of any given product or service including government tax. The presence of deadweight loss is most commonly identified when the quantity produced ''relative'' to the amount consumed differs in regards to the optimal concentration of surplus. This difference in the amount reflects the quantity that is not being utilized or consumed and thus resulting in a ''loss''. This "deadweight loss" is therefore attributed to both, producers and consumers because neither one of them benefits from the surplus of the overall production. Deadweight loss can also be a measure of lost economic efficiency when the socially optimal quantity of a good (economics), good or a service is not produced. Non-optimal production can be caused by monopoly pricing in the case of artificial scarcity, a positive or negative externality, a effect of taxes and subsidies on price, tax or subsidy, or a binding price ceiling or price floor suc ...
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Economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interactions of Agent (economics), economic agents and how economy, economies work. Microeconomics analyzes what's viewed as basic elements in the economy, including individual agents and market (economics), markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyzes the economy as a system where production, consumption, saving, and investment interact, and factors affecting it: employment of the resources of labour, capital, and land, currency inflation, economic growth, and public policies that have impact on glossary of economics, these elements. Other broad distinctions within economics include those between positive economics, desc ...
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Tax Wedge
The tax wedge is the deviation from the equilibrium price and quantity (P^* and Q^*, respectively) as a result of the taxation of a good. Because of the tax, consumers pay more for the good (P_c) than they did before the tax, and Vendor (supply chain), suppliers receive less for the good (P_s) than they did before the tax . Put differently, the tax wedge is the difference between the price consumers pay and the value producers receive (net of tax) from a transaction. The tax effectively drives a "wedge" between the price consumers pay and the price producers receive for a product. Following the Law of Supply and Demand, as the price to consumers increases, and the price received by suppliers decreases, the quantity that each wishes to trade will decrease. After a tax is introduced, a new equilibrium is reached, where consumers pay more (P^* \rightarrow P_c), suppliers receive less (P^* \rightarrow P_s), and the quantity exchanged falls (Q^* \rightarrow Q_t). The difference between ...
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Arthur Cecil Pigou
Arthur Cecil Pigou (; 18 November 1877 – 7 March 1959) was an English economist. As a teacher and builder of the School of Economics at the University of Cambridge, he trained and influenced many Cambridge economists who went on to take chairs of economics around the world. His work covered various fields of economics, particularly welfare economics, but also included Business cycle theory, unemployment, public finance, index numbers, and measurement of national output.Nahid Aslanbeigui, 2008. "Pigou, Arthur Cecil (1877–1959)," ''The New Palgrave Dictionary of Economics'', 2nd edAbstract./ref> His reputation was affected adversely by influential economic writers who used his work as the basis on which to define their own opposing views. He reluctantly served on several public committees, including the Cunliffe Committee and the 1919 Royal Commission on Income tax. Early life and education Pigou was born at Ryde on the Isle of Wight, the son of Clarence George Scott Pigou, ...
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Substitution Effect
In economics and particularly in consumer choice theory, the substitution effect is one component of the effect of a change in the price of a good upon the amount of that good demanded by a consumer, the other being the income effect. When a good's price decreases, if hypothetically the same consumption bundle were to be retained, income would be freed up which could be spent on a combination of more of each of the goods. Thus the new total consumption bundle chosen, compared to the old one, reflects both the effect of the changed relative prices of the two goods (one unit of one good can now be traded for a different quantity of the other good than before as the ratio of their prices has changed) ''and'' the effect of the freed-up income. The effect of the relative price change is called the ''substitution effect'', while the effect due to income having been freed up is called the ''income effect''. If income is altered in response to the price change such that a new budg ...
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Relative Price
A relative price is the price of a commodity such as a good or service in terms of another; i.e., the ratio of two prices. A relative price may be expressed in terms of a ratio between the prices of any two goods or the ratio between the price of one good and the price of a market basket of goods (a weighted average of the prices of all other goods available in the market). Microeconomics can be seen as the study of how economic agents react to changes in relative prices, and of how relative prices are affected by the behavior of those agents. The difference and change of relative prices can also reflect the development of productivity. In a demand equation In the demand equation Q=f(P) (in which Q is the number of units of a good or service demanded), P is the relative price of the good or service rather than the nominal price. It is the change in a relative price that prompts a change in the quantity demanded. For example, if all prices rise by 10% there is no change in any r ...
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Indifference Curves
In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is ''indifferent''. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come. The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles. There are infinitely many indifference curves: one ...
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Elasticity (economics)
In economics, elasticity measures the percentage change of one economic variable in response to a percentage change in another. If the price elasticity of the demand of something is -2, a 10% increase in price causes the demand quantity to fall by 20%. Introduction Elasticity is an important concept in neoclassical economic theory, and enables in the understanding of various economic concepts, such as the incidence of indirect taxation, marginal concepts relating to the theory of the firm, distribution of wealth, and different types of goods relating to the theory of consumer choice. An understanding of elasticity is also important when discussing welfare distribution, in particular consumer surplus, producer surplus, or government surplus. Elasticity is present throughout many economic theories, with the concept of elasticity appearing in several main indicators. These include price elasticity of demand, price elasticity of supply, income elasticity of demand, elastici ...
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Consumer Surplus
In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities: * Consumer surplus, or consumers' surplus, is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay. * Producer surplus, or producers' surplus, is the amount that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for; this is roughly equal to profit (since producers are not normally willing to sell at a loss and are normally indifferent to selling at a break-even price). Overview In the mid-19th century, engineer Jules Dupuit first propounded the concept of economic surplus, but it was the economist Alfred Marshall who gave the concept its fame in the field of economics. On a standard supply and demand diagram, consumer su ...
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Alfred Marshall
Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist, and was one of the most influential economists of his time. His book '' Principles of Economics'' (1890) was the dominant economic textbook in England for many years. It brought the ideas of supply and demand, marginal utility, and costs of production into a coherent whole. He is known as one of the founders of neoclassical economics. Life and career Marshall was born at Bermondsey in London, second son of William Marshall (1812–1901), clerk and cashier at the Bank of England, and Rebecca (1817–1878), daughter of butcher Thomas Oliver, from whom, on her mother's death, she inherited property. William Marshall was a devout strict Evangelical, "author of an Evangelical epic in a sort of Anglo-Saxon language of his own invention which found some favour in its appropriate circles" and of a tract titled ''Men's Rights and Women's Duties''. Marshall had two brothers and two sisters; a cousin was the econ ...
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Marshallian Demand Function
In microeconomics, a consumer's Marshallian demand function (named after Alfred Marshall) is the quantity they demand of a particular good as a function of its price, their income, and the prices of other goods, a more technical exposition of the standard demand function. It is a solution to the utility maximization problem of how the consumer can maximize their utility for given income and prices. A synonymous term is uncompensated demand function, because when the price rises the consumer is not compensated with higher nominal income for the fall in their real income, unlike in the Hicksian demand function. Thus the change in quantity demanded is a combination of a substitution effect and a wealth effect. Although Marshallian demand is in the context of partial equilibrium theory, it is sometimes called Walrasian demand as used in general equilibrium theory (named after Léon Walras). According to the utility maximization problem, there are ''L'' commodities with price vector '' ...
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John Hicks
Sir John Richards Hicks (8 April 1904 – 20 May 1989) was a British economist. He is considered one of the most important and influential economists of the twentieth century. The most familiar of his many contributions in the field of economics were his statement of consumer demand theory in microeconomics, and the IS–LM model (1937), which summarised a Keynesian view of macroeconomics. His book ''Value and Capital'' (1939) significantly extended general-equilibrium and value theory. The compensated demand function is named the Hicksian demand function in memory of him. In 1972 he received the Nobel Memorial Prize in Economic Sciences (jointly) for his pioneering contributions to general equilibrium theory and welfare theory. Early life Hicks was born in 1904 in Warwick, England, and was the son of Dorothy Catherine (Stephens) and Edward Hicks, a journalist at a local newspaper. He was educated at Clifton College (1917–1922) and at Balliol College, Oxford (1922– ...
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Hicksian Demand Function
In microeconomics, a consumer's Hicksian demand function or compensated demand function for a good is his quantity demanded as part of the solution to minimizing his expenditure on all goods while delivering a fixed level of utility. Essentially, a Hicksian demand function shows how an economic agent would react to the change in the price of a good, if the agent's income was compensated to guarantee the agent the same utility previous to the change in the price of the good—the agent will remain on the same indifference curve before and after the change in the price of the good. The function is named after John Hicks. Mathematically, :h(p, \bar) = \arg \min_x \sum_i p_i x_i : \ \ u(x) \geq \bar . where ''h''(''p'',''u'') is the Hicksian demand function, or commodity bundle demanded, at price vector ''p'' and utility level \bar. Here ''p'' is a vector of prices, and ''x'' is a vector of quantities demanded, so the sum of all ''p''''i''''x''''i'' is total expenditure o ...
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