Ch. 5: Consumers and Incentives

Question 1

Buyers problem (3 things)

Answer 1

What you like
Prices of goods and services
How much money you have to spend

Question 2

Budget set

Answer 2

Is the set of all possible bundles of goods and services that a consumer can purchase with her income.

Question 3

Consumer surplus

Answer 3

Is the difference between the willingness to pay and the price paid for the good.

Question 4

Elasticity

Answer 4

Measures the sensitivity of one economic variable to a change in another.
It tells us how much one variable changes when another changes.
More precisely, elasticity is a ratio of percentage changes in variables.

Question 5

Price elasticity of demand

Answer 5

Measures the percentage change in quantity demanded of a good resulting from a percentage change in the good’s price.
Percentage change in quantity demanded/Percentage change in price.

Question 6

Elastic demand

Answer 6

Goods with a price elasticity of demand greater than 1

>1

Question 7

Perfectly elastic

Answer 7

Demand is highly responsive to price changes—the smallest increase in price causes consumers to stop consuming the good altogether.
Infinite, horizontal line

Question 8

Unit elastic demand

Answer 8

Goods with a price elasticity of demand equal to 1

=1

Question 9

Inelastic demand

Answer 9

Goods with a price elasticity of demand less than 1

<1

Question 10

Perfectly inelastic

Answer 10

The quantity demanded is completely unaffected by price
=0, vertical line
Ex: Medicine

Question 11

Cross-price elasticity of demand

Answer 11

Is a measurement of the percentage change in quantity demanded of a good due to a percentage change in another good’s price.
Percentage change in quantity demanded of good x/Percentage change in price of good y.
Negative = complements
Positive = substitutes

Question 12

Income elasticity of demand

Answer 12

Informs us of the percentage change in quantity demanded of a good due to a percentage change in the consumer’s income.
Percentage change in quantity demanded/Percentage change in income
Negative = Inferior goods
Positive = Normal goods
Luxury goods = >1

Question 13

Normal good

Answer 13

A good is normal if the quantity demanded is directly related to income; when income rises, consumers buy more of a normal good.

Question 14

Inferior good

Answer 14

A good is inferior if the quantity demanded is inversely related to income; when income rises, consumers buy less of an inferior good.