1- Linear and non-linear equations Flashcards
Demand function
P= aQ +b
Why is demand function crude?
It assumes price is the only determinant of demand.
What side of the equation is tax on?
On supply side
Effect of a change in an exogenous variable on the demand curve?
Deman shifts
Effect of a change in an endogenous variable on the demand curve?
Movement along the fixed demand curve
Components of aggregate expenditure
Consumer expenditure
Investment expenditure
Gov expenditure
Export expenditure - import expenditure
Equilibrium E=Y curve
45 degree angle
Intercept of aggregate expenditure curve
constants + exogenous variables
Slope of aggregate expenditure curve
‘marginal propensity to spend’ out of current income
Consumption function
a + bY
a- autonomous consumption
b- mpc
Y- national income
Y equation in equilibirum
Y=C+I
Assume there is no leakages
I=S
Savings function
Y= C+S
Rearrange consumption function
Multiplier equation
1/ (1-b)
If there is taxation what must be present?
Government spending
MPC + MPS = ?
1
E=Y meaning?
aggregate expenditure = aggregate supply
Where is the equilibrium on the graph?
Where the 45-degree line meets the E line
PED equation
% change in QD/ % change in P=
(Change in Q/Change in P) x (Price/Quantity)
Why is PED always negative
Due to law of demand
PED value if inelastic?
E<1
PED value if elastic?
E>1
What is arc elasticity?
Works out the average elasticity of 2 points
Arc elasticity equation
Look in book
Switch of demand function to work out income elasticity
D= a0 + a1P1 + a2Y
a1 <0 and a2>0
Income elasticity equation
change in QD/ change in Y x (Y/D)
Same can be done with non-linear models but with logs
