CHAPTER FIVE –CONSUMERS AND INCENTIVES Flashcards
Name the three elements of the buyers problem
- What you like
- Prices of goods and services
- How much money you have to spend
Whats the formula of opportunity cost?
Opportunity Cost = Loss / Gain
Whats the budget constraint?
The budget constraint represents the
goods or activities that a consumer can choose that exactly exhausts the entire budget.
Whats the consumer surplus?
Consumer surplus is the difference between the willingness to pay (the height of your demand curve) and
the price actually paid for the good.
Whats the price elasticity of demand?
The price elasticity of demand measures the percentage change in quantity demanded of a good due to
a percentage change in its price.
Whats the formula of the price elasticity of demand?
Price elasticity of demand = percentage change in quantity demanded / percentage change in price
Goods have an ______ when they have a price elasticity of demand greater than 1.
Goods have an elastic demand when they have a price elasticity of demand greater than 1. Any price
increase will lead to lower revenues. A very small increase in price would lead people to stop using the
good when they have a perfect elastic demand.
Goods have ______ elastic demand when they have a price elasticity of demand equal to 1.
Goods have an unit elastic demand when they have a price elasticity of demand equal to 1. Any price
increase will leave the revenue unchanged; because the revenue is maximized.
Goods have ______ demand when they have a price elasticity of demand less than one.
Goods have an inelastic demand when they have a price elasticity of demand less than one. Any price
increase will lead to higher revenues. When P increases but Q stays the same we say that goods have a
perfectly inelastic demand.
Name the three primary reasons for elastic difference
- Closeness of substitutes. As the number of available substitutes grows, the price elasticity of
demand increases. - Budget share spent on the good. As you spend more of your budget on a good, the price elasticity
of demand increases. - Available time to adjust. Consumers, in general, respond much less to price changes in the short
run than in the long run.
Whats the cross-price elasticity & whats the formula of it?
The cross-price elasticity of demand measures the percentage change in quantity demanded of a good
due to a percentage change in another good’s price.
Cross − price elasticity =
Percentage change in quantity demanded of good x /
Percentage change in price of good y
Whats the income elasticity and whats the formula of it?
The income elasticity of demand measures the percentage change in quantity demanded due to a
percentage change in income. It is given by the following formula:
Income elasticity =
Percentage change in quantity demanded /
Percentage change in income
Name the three measures of demand elasticity
- Price elasticity of demand
- Cross-price elasticity of demand
- Income elasticity of demand
What question does the price elasticity of demand answer?
How much does quantity demanded
change when the good’s price changes?
Mathematically: the percentage change in quantity
demanded due to a percentage change in its price
The elasticity of demand is usually … due to the …
The elasticity of demand is usually negative tue to the law of demand
Name the elasticities ED > 1 = ED < 1 = ED = 1 = ED = ∞ = ED = 0 =
ED > 1 = Elastic ED < 1 = Inelastic ED = 1 = Unit Elastic ED = ∞ = Perfectly Elastic ED = 0 = Perfectly Inelastic
What does the graph of a perfectly elastic demand curve look like?
Straight horizontal line
What does the graph of a unit elastic demand curve look like?
Decreasing curve
What does the graph of a perfectly inelastic demand curve look like?
Straight vertical line
What does the graph of a perfectly inelastic demand curve look like?
Straight vertical line
Whats the formula of total revenue?
TR = P x Q
What are determinants?
• Number and closeness of substitutes
• Budget share spent on the good
• Time horizon available to adjust to price
changes
What question does the cross price elasticity of demand answer?
How much does quantity demanded change of
one good when price of another good changes?
What question does the cross price elasticity of demand answer?
How much does quantity demanded change of
one good when price of another good changes?
Whats the formula of the cross price elasticity?
CPE = percentage change in quantity demanded of good x / percentage change in price of good y
What question does the income elasticity of demand answer?
How much does quantity demanded change
when income changes?
Whats the formula of the income elasticity?
IE = Percentage change in quantity demanded / percentage change in income
Question 1. Something that has been left out of a study that, if included, would explain why
two variables in the study are correlated is an example of:
a) omitted variable
b) randomization
c) reverse causality
d) comparative statics
A
Question 2. Consider the following two statements:
Statement A: In the past year, the chocolate industry in the European Union registered its
highest monthly growth rate in December.
Statement B: The best policy of the EU to reduce sugar consumption is to tax soft drinks.
Which of the following options is correct?
a) Both statements are positive statements.
b) Both statements are normative statements.
c) Statement A is a positive statement and statement B is a normative statement.
d) Statement A is a normative statement and statement B is a positive statement.
C
Question 3. The return that could have been earned on the down payment for a house is an often overlooked of buying a house. a) omitted variable b) marginal benefit c) opportunity cost d) budget constraint
C
Whats an indifference curve?
An indifference curve shows all combinations of goods that provide an equal level of utility or satisfaction
What is referred to as utility?
Utility in economics is a measure of satisfaction or happiness that comes from consuming a good or service. The intuition of an indifference curve is that regardless of where you are on that curve, you are equally happy, or have the same level of utility
