Chapter 6- Demand Flashcards
Normal goods
A good for which quantity demanded rises with income
Δx1/Δ m > 0 ( change in good 1 and change in income always go in the same direction)
Inferior good
A good for which quantity demanded falls as income increases
ex. If you’re a poor college student who consumes large amounts of ramen because is afforable, if you’re income increased you would consume less ramen and eat “better” foods thus ramen is an inferior good to you
Ordinary goods
The demand for ordinary goods rises when prices fall
own price change
Giffen Goods
The demand for giffen goods falls when price falls
own price change
Own price elasticity
I you have a negative elasticity what ever change in price the demand will go in the opposite direction
ρx1(p1, p2, m)/ρp1
Or
Ex,p= %Δx1/ %Δp1 =(Δx1/x)/(Δp1/p)=(Δx/Δp)/(x/p)
=Δx/Δp*p1/x1
=ρx1(p1, p2, m)/ρp1 * p1/(x1 (p1, p2, m)
Relatively elastic
Relatively Elastic: |Ex1,p1| >1
small change in price will have large effect on quantity demanded
Unit Elastic
Unit Elastic: |Ex1,p1| =1
Price elasticity equal to 1, if you have a 1% change in price you wall have a 1% change in demand
Relatively Inelastic
relatively Inelastic: |Ex1,p1| > 1
Perfectly Inelastic
Perfect Elasticity: Ex1,p1=0
No matter what the price is you are willing to get it. Quantity demanded stays the same
Cross price elasticity
Ex1,p2 or Ex2,p1
If the price of one good increases, the quantity of one good will increase (substitutes positive cross price elasticities) or decrease (complements negative cross price elasticities)
Scale invariance
A function is scale invariant iff F(λx1, λx2) = F(x1,x2) and for all x1, x2, λ>0
Also called the homogeneity of degree 0
“If you multiple a function by λ the λs will completely cross out and you will have the original function.
Demand functions are scale invariant:
x1* (λp1,λp2,λm) =x1*(p1,p2,m) “if prices and income all double then the set of allowed trade offs is exactly the same as before
