2 Elasticity & Consumer Behavior

Question 1

Price Elasticity of Demand

Answer 1

% Change in Q / % Change in P

> 1 : elastic
1: unit elastic
< 1 : inelastic

At specific pt: P/Q x 1/slope
(opp of Q/P)

Question 2

Determinants of Price Elasticity of demand

Answer 2

1. Substitution options
2. Budget share
3. Time

More^, more elastic

Question 3

Determinants of Price elasticity of Supply

Answer 3

1. Input flexibility
2. Mobility of inputs
3. Produce substitute inputs
4. TimeMore^, more elastic

Question 4

Marginal utility formula
(utility: satisfaction people derive from consumption)

Answer 4

Change in utility / change in consumption

Upward sloping but low hanging - law of diminishing marginal utility
- tendency for additional utility gained from consuming an additional unit of good to decrease as consumption increases beyond some point

Question 5

Economic surplus =
Consumer surplus =
Producer surplus =

Answer 5

Economic surplus = consumer surplus + producer surplus

Consumer surplus = buyer’s reservation price - market price

Producer surplus = market price - seller’s reservation price

Question 6

Market demand curve

Answer 6

Horizontal sum of individual demand curves

Eg at $1, A = 4units, B = 2 units

When combining graph at $1, qty demanded = 6 units

Question 7

Formula for:
PRICE elasticity of demand

INCOME elasticity of demand
Postive/negative means?

CROSS-PRICE elasticity of demand
Positive/negative means?

Answer 7

PRICE = % change in qty demanded / % change in price
*ignore signs
> 1 : elastic
1: unit elastic
< 1 : inelastic

INCOME = % change in qty demanded / % change in income
+: normal good (>1, luxury. <1: necessity)
-: inferior good

CROSS-PRICE = % change in qty demanded for A / % change in price of B
+: substitutes
-: complements

Question 8

Rational spending rule

Answer 8

Stop when marginal utility per dollar is the same

MU/p