Bocconi Micro Flashcards
What are substitutes?
Products that are interchangeable; a price increase in one causes a demand increase in another (ex: corn & potatoes).
What are complements?
Products that are codependent; a price increase in one causes a demand decrease in another (ex: corn & fuel)
What is elasticity?
A measure of the % change in Y caused by a % change in X.
What is the price elasticity of demand?
It measures how responsive the quantity demanded is to any changes in price.
What happens with the Substitution Effect
The good becomes more expensive relative to all goods, and so people find cheaper alternatives to that good
What happens with the Income Effect?
The purchasing power of the consumer falls, and they must adjust their purchases accordingly.
What happens when supply increases and demand stays the same?
Price goes down, quantity goes up
What happens when supply decreases and demand stays the same?
Price goes up, quantity goes down.
What happens when demand rises and supply stays the same?
Price goes up, quantity goes up.
What happens when demand falls and supply stays the same?
Price goes down, quantity goes down.
What happens when supply goes up and demand goes up (by a proportional amount)?
No changes.
What happens when supply goes up and demand goes down?
Price goes down, quantity is ambiguous.
What happens when supply goes down and demand goes up?
Price goes up, quantity is ambiguous.
When can we observe a maximized expenditure?
When the elasticity of demand is -1.
What is a normal good?
A good that is purchased more when the income of a consumer rises.
It has positive income elasticity of demand, i.e. %change in income = %change in demand
What is an inferior good?
A good that is purchased less when the income of the consumer falls.
It has negative income elasticity of demand, i.e. %change in income = - %change in demand
What is the cross-price elasticity of demand?
It measures how responsive the demand of one product is relative to a price changes in another product. The formula is (ΔQ/Q)/(ΔPo/Po)
If it is > 0 they are perfect substitutes.
If it is < 0 they are perfect complements.
What is the formula (and its equivalents) for Marginal Rate of Substitution (MRS)?
= -(ΔX/ΔY)
= Px/Py
= MUx/MUy
What is the formula for marginal utility?
MUx = -(ΔUx/ΔX)
What is the formula for compound interest rate?
Balance = Starting Amount(1+Rate)^Time
What is the formula for present discounted value?
PDV = Future Value/(1+Rate)^Time
What is the budget constraint formula?
M ≥ XPx + YPy
What is an interior choice?
A bundle that is not objectively better, i.e. there are other bundles on the same budget constraint that contain a little bit more or a little bit less of each good.
When a solution is not interior it lies on one of the intercepts.
What are Engel curves?
They show the relationship between the consumption of a good and the income of the consumer.
