Consumers Flashcards
Buyer’s problem factors:
- Preferences
- Budget
- Prices
What is marginal benefit?
Consumption with budget constraints
The additional benefit derived from a unit increase in an activity
Consumer Surplus
Willingness v price
Elasticity
Sensitivity of one variable to a change in another (wages and spending…)
Elasticity Factors:
- Substitutes
- Budget share (remember if something is a small part of your budget you’ll pay for the good even if the price goes up a lot (inelastic good); small v large share): homes are elastic goods
- Time horizon
Price elasticity of demand eq?
(% change in Qd)/(% change in P)
Cross-Price elasticity of demand eq (complement and supplement)?
(% change in Qd of good x)/(% change in price of good y)
If the cross price of elasticity is > 0, substitute or complement?
Substitute (if < 0 complement)
Income elasticity of demand eq?
(% change in Qd)/(% change in income)
>0 normal good
<0 inferior good
Calculating marginal product?
(Y3-Y2)/(X3-X2) or similar…
Marginal benefit calculation?
[(Y3-Y2)/(X3-X2)]/price of good
e.g. coffee costs $2:
[(225-200)/(2-1)]/$2 = $12.5
What should you do to maximize optimal consumption?
- Spend entire budget
- Chase highest MB/$
How does elasticity work from A to C?
Elasticity: change in quantity divided by the change in price
[(Qc-Qa)/(Qa)]/[(Pc-Pa)/(Pa)] = Elasticity
If C to A, the answer is the inverse…
Do you know how to use the Midpt Method?
Same as calculating elasticity, but instead of using A or C as our endpoint that divided change in over, we make the midpt what you divide change by. If the midpt is B: [(Qc-Qa)/Qb]/[(Pc-Pa)/Pb] = Midpt Method Elasticity
Elasticity equation
%changeQ / %changeP
