4. Individual and Market Demands Flashcards
Price Consumption Curve (PCC)
For goods is the set of optimal bundles traced on an indifference map and X varies Y is constant
How do you get a demand schedule?
Fro the consumption curve
What does a demand curve infer?
Tells the quantities the consumer will buy at various prices
What is the substitution effect?
The total effect of a price change. substitutes that might be more desirable
What is the income effect?
Total effect of price change that results from an associated change in purchasing power
What is total effect?
Sum of substitution and income effects
What happens to the total effect when it is an inferior good?
Increase in price
Reduction in quantity
What happens with the substitution effect?
When prices go up (down) quantity demanded goes down (up)
What happens to the income effect with a normal and inferior good?
When the price goes up,
Normal good: quantity demanded goes down (up_
Inferiror good: quantity demanded goes up (down)
What is a giffen good?
one for which the quantity demanded rises as its price rises
Must be an inferior good
What is an example of an griffen good?
Potato famine
What is an engel curve?
Curve that plots the relationship between quantity of X consumer and income
What is a market demand curve?
Horizontal summation of individual demand curves
Price elasticity of demand
The percentage change in the quantity of a good demanded that results froma 1 percent change in tis price
What is the price elasticity is there is a 1% rise in the price of shelter which causes a 2% reduction in the quantity of shelter?
-2
What arehe 3 categories of price elasticity and their categories?
elastic -1
Unit elastic =-1
What is the equation for elasticity?
Ɛ=ΔQ/ΔP*P/Q
What is the unit of elasticity?
No unit
What is the point slope method of determining elasticity?
Ɛ=(P/Q)*(1/slope)
What happens to the demand and total expenditure when the change in price is small?
Total expenditure will move if we know the initial price elasticity demand
What happens with a price reduction and total revenue?
Will increase total revenue if absolute value of price easticity is greater than 1
What are substitution possibilites
Abs value of the price elasticity will rise with the availabiity of attractive substitutes
What is budget share?
The smaller the share of total expenditure accounted for by a good, less elastic demand will be
Direction of income effect?
Normal good will have higher price elasticity than an inferior good
Time’s effect on demand?
Demand for a good will be more responsive to price in the long run than in the short run
What is the equation for the income elasticity of demand?
η=ΔQ/ΔY*Y/Q
What are the characteristics of income elasticity of demand?
If stbale engle curve, we can define its income of elasticity of demand, the percentage change in the quantity of a good demanded that results from a 1 percent change in income
What is the elasticity of a necessity good?
0-1
What is the elasticity of a luxury good?
> 1
What is the elasticity of a inferior good?
<0
What is the cross price elasticities of demand?
The percentage change in quantity of one good demanded that results from a 1% change in price of other good
What is the equationfor a cross price elasticities of demand?
Ɛ=ΔQx/ΔPz*Pz/Qx
What is the elasticity of a complement good?
Negative
What is the elasticity of a substitute good?
positive
When elasticity is >1 ?
Price reduction increase total expenditure
A Price increase reduces expenditure
When the elasticity is 1?
Total expenditure is at a maximum
When the elasticity is <1?
A price redcution reduce total expenditure
A price increase increases it
