Excise tax:A per unit tax on production results in a vertical shift upward in the supply
curve by the amount of the tax.
Incidence of Tax:The proportion of the tax paid by consumers in the form of a higher
price for the taxed good is greater if demand for the good is inelastic and supply is elastic.
Deadweight Loss:The lost net benefit to society caused by a movement away from the
competitive market equilibrium. Policies like excise taxes create lost welfare to society.
Subsidy:Has the opposite effect of an excise tax, as it lowers the marginal cost of produc-
tion, resulting in a downward vertical shift in the supply curve for good X.
Price floor:A legal minimum price below which the product cannot be sold. If a floor is
installed at some level above the equilibrium price, it creates a permanent surplus.
Price ceiling:A legal maximum price above which the product cannot be sold. If a ceiling
is installed at a level below the equilibrium price, it creates a permanent shortage.
Utility:Happiness, benefit, satisfaction, or enjoyment gained from consumption.
Total utility:Total happiness received from consumption of a number of units of a good.
Marginal utility:The incremental happiness received, or lost, when the consumer increases
consumption of a good by one unit.
Utils:A unit of measurement often used to quantify utility. Also known as “happy points.”
Law of diminishing marginal utility:In a given time period, the marginal (additional)
utility from consumption of more and more of that item falls.
Constrained utility maximization: For a one-good case. Constrained by prices and
income, a consumer stops consuming a good when the price paid for the next unit is equal
to the marginal benefit received.
Utility maximizing rule:The consumer maximizes utility when they choose amounts of
goods X and Y,with their limited income, so that the marginal utility per dollar spent is
equal for both goods. Mathematically: MUx/Px=MUy/Py,or MUx/MUy=Px/Py.
Horizontal summation:The process of adding, at each price, the individual quantities
demanded to find the market demand curve for a good.
Revenue tariff:An excise tax levied on goods not produced in the domestic market.
Protective tariff:An excise tax levied on a good that is produced in the domestic market
so that it may be protected from foreign competition.
Import quota:A limitation on the amount of a good that can be imported into the domes-
tic market.
Elasticity, Microeconomic Policy, and Consumer Theory ‹ 101