chapter 4 Flashcards
what is an individual demand curve?
the demand curve relating the quantity of a good that a single consumer will buy at differences prices
what is a market demand curve?
the curve relating the quantity of a good that all consumers in a market will buy to its price, the aggregate demand of all individual demand curves
what is consumer surplus?
the difference between what a customer is willing to pay for a good and the amount that is actually paid
what is an example of consumer surplus?
if the willingness to buy a unit if food is 10 dollars and the price is 8 dollars for a unit of food, the consumer surplus is 2 dollars
what will the 2 axises be on a demand curve?
P on vertical and Q on horizontal
what function does a demand curve show?
shows quantity demanded as a function of price, everything else held constant
what is the slope of the indifference curve?
the marginal rate of substitution, MRS
when is the utility maximized on an indifference curve when there is a budget constraint?
the slope of the indifference curve must match up with the slope of the budget constraint line
what is the price consumption curve?
the baskets that maximize utility for various prices of a certain good
what are normal goods?
when income increases the demand for these goods also increase
what is an example of normal goods?
food, clothing
what are inferior goods?
when income increases the demand for these goods decrease
what is an example of inferior goods?
bus tickets
how does a pivot in the budget constraint impact what baskets maximize utility?
there will be larger increase in the good that is getting cheaper
what are the 2 things that will cause consumers to alter their choice of market baskets?
reduction in the price of a good
change in income
how does a shift in the budget line impact what baskets maximize utility?
both the amount of each good in the basket will increase by a similar percentage, if income gets larger, they consumer will purchase buy as much of each good as they can instead more of a singe one
what are substitutes?
two goods are substitutes if an increase in the price of one leads to an increase in the quantity demanded of the other
what is an example of goods that are substitutes?
if the price of a PC gets very expensive the demand for Macs will increase because people will buy more of the other and substitute the expense one out
what are compliments?
two goods are compliments if an increase in the price of one good leads to a decrease in the quantity demanded of the other
what is an example of goods that are compliments?
tennis ball and tennis racket, if balls get more expensive people will demand less rackets because you need both
what determines if goods are compliments or substitutes?
the consumers preferences
what are the 2 effects that a fall in the price of a good has?
the substitution effect
the income effect
what is the substitution effect when prices of goods change?
when consumers tend to buy more of the good that has become cheaper and less goods that are now relatively more expensive (substituting the cheaper good for the relatively expensive ones)
what is the income effect when prices of goods change?
since one of the goods is now cheaper, consumers enjoy an increase in real income causes them to demand more of all goods not just the cheaper one
what is the total effect when prices of goods change?
the total effect of a change in price is given by the some of the substitution effect and the income effect
TE(F1F2)= SE(F1F)+ IE(EF2)
when your optimal basket changes due to a change in price of goods, is that substitution effect or income effect?
substitution effect
when your optimal basket changes due to a change in income, is that substitution effect or income effect?
income effect
if a bundle on an indifference curve is on the budget constraint line but not where the slope of each line is equal, is it maximizing utility?
no, it is only maximizing budget
what is market demand?
the sum of all of the individual demands in the market
what does the market demand curve show?
all of the different quantities the market demands at certain price points
what is consumer surplus?
the difference between the willingness to pay and the final market price to consumers
are prices taken as given in a perfectly competitive market?
yes
what do all the different points on a demand curve represent?
the willingness to pay for a good
explain consumer surplus?
lets say a consumer is willing to pay 20 for 1 unit of clothing, but the market price is 14, the consumer surplus is 6 because he is saving 6 dollars due to the market price
what is the formula to find the dollar amount of consumer surplus?
1/2 X (highest willingness to pay - market price) X the market supply quantity
what is the consumer surplus if
highest willingness to pay= 20
market price= 14
market supply quantity= 6500
1/2 X (20-14) X 6500 = 19,500
what is the elasticity of a good?
how consumers will react to a change In price of that good
what is inelastic demand?
the quantity demanded of a good is relatively unresponsive to changes in price
if the price of a good with inelastic demand increases, how will that impact the total expenditure on that good?
it will cause the expenditure to increase, people buy similar amount to before increase but now at higher price
what is an example of a good with inelastic demand?
a medicine that someones life depends on
what is elastic demand?
the quantity demanded is responsive to changes in price
if the price of a good with elastic demand increases, how will that impact the total expenditure on that good?
total expenditures of the product decreases as the price goes up, people buy less in response to the change in price
what is an example of a good with elastic demand?
steak
what is the formula for the elasticity of demand?
(P/Q) X (change in Q/ change in P)
if a good as lots of substitutes would that good be elastic?
yes, people would by the substitutes in response to the increase in price
if a good doesn’t have many substitutes would that good be elastic?
no, people would still buy a lot of that good because there are not many substitutes
how would a rational consumer act?
they would try to maximize utility
what is the consumer utility function?
f (good x, good y)= utility
