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ECON TEST 2
Ch 4-7
| Question | Answer |
|---|---|
| Demand | quantities of goods and services customers are willing & able to buy; flow concept (measured over time) |
| How does quantity demanded differ from quantity bought | Bought depends on availability Demanded depends on income |
| Types of demand & supply | Individual & Market |
| Demand determinants | Complements, Related goods, Changes in income |
| Demand determinants | Price of product (Change in Qd) Price of related products ( Complements & Substitutes) Consumer income Consumer taste/preferance Size of household Expected future prices |
| Law of demand | Inverse relationship between price & QUANTITY demanded |
| Market demand | Sum of demand of all persons |
| Movement along demand curve | Change of price - change of quantity demanded |
| Shift of demand curve | Any change other than the price will shift curve left (decrease) or right (increase) |
| Normal vs inferior goods demand | Normal: income increases - demand inceases Inferior: income increases - demand falls |
| Supply | quantities of goods ans services producers plan to sell at each possible price; flow concept |
| Law of supply | Positive relationship between price and QUANTITY supplied, profit motive |
| Individual supply determinants | Price of the product (Change in Qs) Price of alternative products Price of factos of production & other inputs Expected future prices Technology Government policy Natural disasters Joint- and by-products Productivity |
| Market supply | Sum of all individual supplies |
| Movement along supply curve | Change in price - change in quantity demanded |
| Movement of the supply curve | Any othe changes causes change in suppy & moves curve left or right |
| Market equilibrium | Qd=Qs Plans of households aligns with plans of fims |
| Market shortage vs market surplus | Shortage: Excess demand Qd>Qs Suprlus: Excess supply Qs>Qd |
| Price Rationing vs Allocative function | Rationing: Ration scarse goods and services to those who place highest volume on them Allocative: Prices serve as signals directing FOP among different uses economy |
| Consumer surplus | Difference between price consumers are willing to pay & what they actually pay (Gain to customers) On demand curve, triangle above Market price |
| Producer surplus | Difference between what a producer is willing to supply & what they actually supply it for (Gain to producers) On Supply curve, triangle left of maket price |
| Linear demand and supply | Qd = -bP+a Qs = dP+c |
| Increase in demand doesn't include | Price only changes Qd |
| Demand increase, supply incease | Price uncertain (D price increases, S price decreases) Quantity increases |
| Demand incease, supply decrease | Price increases Q uncertain (D qincreases, S q decreases) |
| Demand decrease, supply increase | Price decrease Q uncertain ( D q decreases, S q inceases |
| Demand decrease, supply decrease | Price uncertain (D price decreases, S price increases) Q decreases |
| Substitute demands | One increases and one decreases |
| Complements demand | If supply decreases, demand for complement will decrease |
| Price ceiling | Gov sets a maximum legal limit of a price, set below market clearing price Purpose: avoid customer exploitation, combat inflation, limit production of certain goods |
| Excess demand solutions | First come first serve Rationing system |
| Price floor | Gov sets a minimum legal limit of a price, set above equilibrium price Purpose: raise income for producers of goods & services that are essential, protect workers with min wage |
| Excess supply solutions | Exporting surplus Storing Destoying Production quotas |
| Elasticity | Measure responsiveness or sensitivity to change |
| Elasicity coefficient is | value of price elasticity ep = % change in dep variable / % change in indep variable |
| Elasticity for necessities vs luxuries | Necessities are more insensitive to change |
| Elastic vs inelastic | Elastic: ep/es>1 Inelastic: ep/es<1 |
| Types of elasticities | Price elasticity of demand Price elasticity of supply Income elasticity of demand Cross elasticity of demand |
| Price elasticity of demand | % change in Qd ifprice of product changes by 1% ceteris paribus |
| Price elasticity at a point | ep= deltaQ/DeltaP * P/Q (1/slope * point) |
| Price elasticity between points (midpoint) | ep= DeltaQ/DeltaP * EP/EQ (1/slope * sum of point) |
| Total revenue | TR = P*Q ep>1 TR inceases with Q ep=1 TR reaches max ep<1 TR decreases as Q increases |
| Categories of ep | Perfectly inelastic: ep=0 (vertical line) Perfectly elastic: ep=inf (horisontal line) Elastic: ep>1 Inelastic: ep<1 Unitary elastic: ep=1 |
| Determinants of ep | Substitution: more substitutes, greater ep Want satisfies: necessity more inelastic, luxury goods more elastic Degree of complementay: Higer complementary, lower ep Time period:ep lager in long run Portion of income: More income spent, more elastic |
| Income elasticity of demand | Responsiveness of Qd to income changes Ey = % change in Qd / % change in income |
| Positive vs negative income elasticity | Positive: Y increases, Q increases (>1: luxury goods; 0-1: essential good) Negative: Inverse relation (inferior goods) |
| Cross price elasticity of demand | Responsiveness of Qd following price change of related goods Ec = % change in Qd fo A /% change in price of B |
| Ec for types of related goods | Unrelated: zero cross elasticity Subs: Positive cross elasticity of demand (higher price B, higher demand A) Complements: Negative coss elasticity of demand (higher price B, lower demand A) |
| Price elasticity of supply | Responsiveness of Qs to changes in price Es = % change in Qs / % change in price Elastic: produce more without higher cost of time delay Inelastic: difficult to change production in given time period |
| Categories of es | Perfectly inelastic: es = 0 Perfectly elastic: es = inf Elastic: es>1 Inelastic: 0<es<1 Unitary: es = 1 |
| Determinants of es | Time period: Inelastic in sort run Price exp: Higher price exp result in inc supply ( elastic) Storing output: Storage = more elastic Excess capacity: more elasticity Mobility of inputs: easy to move FOP, more elastic |
| Utility | level/degree of satisfaction from consumption abstract & subjective |
| Cardinal vs Ordinal utility | Cardinal: assigned values - measured in utils Ordinal: ranking |
| Marginal utility | additional utility per one extra unit consumed MU = change TU/ change Q |
| Law of diminishing marginal utility | MU declines until it reaches 0, thereafter we have disutility Gossens 1st law |
| Weighted marginal utility | = MU/P value of money consumer get per unit consumed |
| Total utility | TU = Sum of MU Increases with consumption at a decreasing rate |
| Consumer equilibrium | Allocation of income between goods in such a way that Weighted MU are equal Gossens 2nd law Conditions: Must be affordable & Weighter MU must be equal |
| Gossens laws | 1. Law of diminishing MU 2. Consumer eq is combinations are affordable & has equally weighter MU |
Created by:
CARA.FAURIE
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