Question | Answer |
Perfectly Elastic | ∈ = ∞ |
Elastic | ∈ > 1 |
Unitary Elastic | ∈ = 1 |
Inelastic | ∈ < 1 |
Perfectly Inelastic | ∈ = 0 |
SIMPLE FORMULA | absolute value of % change in quantity demanded / % change in price |
MIDPOINTS FORMULA | (Q2-Q1)/(Q2+Q1) x (P2+P1)/(P2-P1) |
STRAIGHT LINE DEMAND CURVES | elastic at prices above the midpoint and inelastic at prices below it |
VERTICAL DEMAND CURVES | perfectly inelastic |
HORIZONTAL DEMAND CURVES | perfectly elastic |
INCOME ELASTICITY OF DEMAND | responsiveness of quantity demand to a change in income |
FORMULA FOR INCOME ELASTICITY OF DEMAND | (Q2-Q1)/(Q2+Q1) x (I2+I1)/(I2-I1) |
What kind of good is ∈IE > 0 | NORMAL GOOD |
What kind of good is ∈IE < 0 | INFERIOR GOOD |
if the supply curve is more elastic than the demand curve, | consumers carry more of the tax burden |
if the demand curve is more elastic than the supply curve, | suppliers carry more of the tax burden |
if the supply (demand) curve is perfectly elastic, | consumers (suppliers) carry ALL of the tax burden |
if the supply (demand) curve is perfectly inelastic, | suppliers (consumers) carry ALL of the tax burden |
If |∈|A >|∈|B, |∈|A is.. | more ELASTIC than |∈|B at given price levels |
The FLATTER the curve, | the more elastic the curve at every price level |
The STEEPER the curve, | the more inelastic the curve at every price level |
CROSS-PRICE ELASTICITY | responsiveness of quantity demand of good x to a change in the price of good y |
CROSS-PRICE ELASTICITY FORMULA: | (Qx2-Qx1)/(Qx2+Qx1) x (Py2+Py1)/(Py2-Py1) |
PRICE ELASTICITY OF DEMAND | The ratio of the percentage of change in quantity demanded to the percentage of change in price; measures the responsiveness of quantity demanded to changes in price. |
PERFECTLY INELASTIC DEMAND | Demand in which quantity demanded does not respond at all to a change in price |
ELASTICITY OF DEMAND FORMULA | % change in quantity demanded / % change in price |
total revenue = | price x quantity |
when the price goes up, | quantity demanded goes down |
when the price goes down, | quantity demanded goes up |
marginal utility | the additional satisfaction gained by the consumption or use of one more unit of a good or service |
Utility maximizing rule: | MUx/Px = MUy/Py |
LAW OF DIMINISHING MARGINAL UTILITY | the more of any one good consumed in a given period, the less satisfaction (utility) generated by consuming each additional (marginal) unit of the same good. |
THE INCOME EFFECT | if we assume that households confine their choices to products that improve their well-being, then a decline in the price of any product, ceteris paribus, will make the household unequivocally better off. |
THE SUBSTITUTION EFFECT | A fall in the price of product X might cause a household to shift its purchasing pattern away from substitutes toward X. |
NORMAL GOODS | goods for which demand goes up when income is higher and for which demand goes down when income is lower. |
INFERIOR GOODS | goods for which demand tends to fall when income rises. |
SUBSTITUTES | goods that can serve as replacements for one another;l when the price of one increases, demand for the other increases. |
COMPLEMENTS | goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa |
perfectly elastic demand | demand in which quantity drops to zero at the slightest increase in price |
perfectly inelastic demand | demand in which quantity demanded does not respond at all to a change in price |
variation of elasticity along demand curve | elastic at top, inelastic at bottom, unitary elastic in the middle |
price elasticity of demand | % change in quantity demanded / % change in price
(Q2-Q1)/(Q2+Q1)/2 / (P2-P1)/(P2+P1)/2 x 100% |
determinants of elasticity | necessities versus luxuries, availability of substitutes, time of availability, size of purchase |
cross-price elasticity of demand | % change in quantity of Y demanded/% change in price of X |
elasticity of supply | % change in quantity supplied/ % change in price |
elasticity of labor supply | % change in quantity of labor supplied / % change in the wage rate |
derivation of budget constraint | the limits imposed on household choices by income, wealth, and product prices |
choice/opportunity set | the set of options that is defined and limited by a budget constraint |
changes in budget constraint | change when prices rise or fall
Px(X)+Py(Y)=Income |
total utility curve | the total amount of satisfaction obtained from consumption of a good or service. As you continuously had the same good the less satisfaction you get, leveling off the curve at maximum |
marginal utility | the additional satisfaction gained by the consumption or use of one more unit of a good or service.
MU=the slope of the utility curve |
law of diminishing marginal utility | the more of any one good consumed in a given period, the less satisfaction generated by consuming each additional unit of the same good. |
utility maximizing | equating the ratio of the marginal utility of a good to its price for all goods
MUx/Px=MUy/Py |
income effect | decline in price of any product will make the household better off. If a household buys the same amount of a good and service after the price decreases, there will be income left over. |
substitution effect | when a good becomes cheaper it is more attractive relative to potential substitutes. Shift away from substitutes. |
Normal Good | goods for which demand goes up when income is higher and for which demand goes down when income is lower. |
Inferior Good | Goods for which demand tends to fall when income rises |
Substitutes | goods that can serve as replacements for one another; when the price of one increases, demand for the other increases. |
complements | goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa |
labor supply curve | a curve that shows the quantity of labor supplied at different wage rates. It's shape depends on how households react to changes in wag rate. Substitution-upward curve; Income-downward curve "bends back" |