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Eco Exam #2

Docta Chawles

QuestionAnswer
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"
Created by: ciarasafari