Docta Chawles
Quiz yourself by thinking what should be in
each of the black spaces below before clicking
on it to display the answer.
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| Perfectly Elastic | ∈ = ∞
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| Elastic | ∈ > 1
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| Unitary Elastic | ∈ = 1
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| Inelastic | ∈ < 1
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| Perfectly Inelastic | ∈ = 0
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| SIMPLE FORMULA | absolute value of % change in quantity demanded / % change in price
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| MIDPOINTS FORMULA | (Q2-Q1)/(Q2+Q1) x (P2+P1)/(P2-P1)
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| STRAIGHT LINE DEMAND CURVES | elastic at prices above the midpoint and inelastic at prices below it
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| VERTICAL DEMAND CURVES | perfectly inelastic
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| HORIZONTAL DEMAND CURVES | perfectly elastic
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| INCOME ELASTICITY OF DEMAND | responsiveness of quantity demand to a change in income
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| FORMULA FOR INCOME ELASTICITY OF DEMAND | (Q2-Q1)/(Q2+Q1) x (I2+I1)/(I2-I1)
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| What kind of good is ∈IE > 0 | NORMAL GOOD
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| What kind of good is ∈IE < 0 | INFERIOR GOOD
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| if the supply curve is more elastic than the demand curve, | consumers carry more of the tax burden
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| if the demand curve is more elastic than the supply curve, | suppliers carry more of the tax burden
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| if the supply (demand) curve is perfectly elastic, | consumers (suppliers) carry ALL of the tax burden
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| if the supply (demand) curve is perfectly inelastic, | suppliers (consumers) carry ALL of the tax burden
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| If |∈|A >|∈|B, |∈|A is.. | more ELASTIC than |∈|B at given price levels
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| The FLATTER the curve, | the more elastic the curve at every price level
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| The STEEPER the curve, | the more inelastic the curve at every price level
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| CROSS-PRICE ELASTICITY | responsiveness of quantity demand of good x to a change in the price of good y
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| CROSS-PRICE ELASTICITY FORMULA: | (Qx2-Qx1)/(Qx2+Qx1) x (Py2+Py1)/(Py2-Py1)
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| 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.
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| PERFECTLY INELASTIC DEMAND | Demand in which quantity demanded does not respond at all to a change in price
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| ELASTICITY OF DEMAND FORMULA | % change in quantity demanded / % change in price
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| total revenue = | price x quantity
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| when the price goes up, | quantity demanded goes down
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| when the price goes down, | quantity demanded goes up
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| marginal utility | the additional satisfaction gained by the consumption or use of one more unit of a good or service
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| Utility maximizing rule: | MUx/Px = MUy/Py
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| 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.
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| 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.
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| 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.
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| NORMAL GOODS | goods for which demand goes up when income is higher and for which demand goes down when income is lower.
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| INFERIOR GOODS | goods for which demand tends to fall when income rises.
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| SUBSTITUTES | goods that can serve as replacements for one another;l when the price of one increases, demand for the other increases.
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| COMPLEMENTS | goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa
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| perfectly elastic demand | demand in which quantity drops to zero at the slightest increase in price
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| perfectly inelastic demand | demand in which quantity demanded does not respond at all to a change in price
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| variation of elasticity along demand curve | elastic at top, inelastic at bottom, unitary elastic in the middle
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| price elasticity of demand | % change in quantity demanded / % change in price
(Q2-Q1)/(Q2+Q1)/2 / (P2-P1)/(P2+P1)/2 x 100%
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| determinants of elasticity | necessities versus luxuries, availability of substitutes, time of availability, size of purchase
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| cross-price elasticity of demand | % change in quantity of Y demanded/% change in price of X
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| elasticity of supply | % change in quantity supplied/ % change in price
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| elasticity of labor supply | % change in quantity of labor supplied / % change in the wage rate
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| derivation of budget constraint | the limits imposed on household choices by income, wealth, and product prices
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| choice/opportunity set | the set of options that is defined and limited by a budget constraint
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| changes in budget constraint | change when prices rise or fall
Px(X)+Py(Y)=Income
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| 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
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| 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
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| 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.
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| utility maximizing | equating the ratio of the marginal utility of a good to its price for all goods
MUx/Px=MUy/Py
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| 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.
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| substitution effect | when a good becomes cheaper it is more attractive relative to potential substitutes. Shift away from substitutes.
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| Normal Good | goods for which demand goes up when income is higher and for which demand goes down when income is lower.
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| Inferior Good | Goods for which demand tends to fall when income rises
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| Substitutes | goods that can serve as replacements for one another; when the price of one increases, demand for the other increases.
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| complements | goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa
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| 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"
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