Deck From Notes Flashcards
When is there a shift of the demand curve?
There is a shift of the demand curve when any factor other than price changes. For example, a change in price of a substitute or a change in info available to consumers.
When is there a shift along the demand curve?
When there is a change in price of the good in question.
Change in price is…
a movement along the demand curve.
When do we use an inverse demand curve?
We use an inverse demand curve to answer the question about how a change in price affects quantity by making price a function of quantity with algebra.
What does a supply curve show?
A supply curve show the quantity supplied at each price, holding other factors constant.
What is the quantity supplied?
The quantity supplied is the amount of a good firms want to sell at a given price, holding constant other factors that influence firms’ supply decisions, such as costs and government action.
What causes the supply curve to shift?
A change in any variable other than the price of the good in question cause the entire supply curve to shift.
What causes the equilibrium to change?
The equilibrium changes only if a shock occurs that shifts the supply or demand curve.
Do quotas on imports affect the demand or supply curve?
The supply curve.
Does the elasticity of demand vary along most demand curves?
Yes
Perfectly Inelastic
a point where the elasticity of demand is zero. This means the same quantity is demand regardless of the price. The line is vertical.
Unitary Elasticity
A 1% increase in price causes a 1% fall in quantity demanded.
Elastic
At prices higher than the midpoint of the linear demand curve, the elasticity of demand is less than -1.
Define a substitute by the effect that a change in its price has on the good in question.
An increase in the price of X yields an increase in the demand of Y.
Define a compliment, X, in terms of the effect a change in its price has on the quantity demanded of Y.
Good X is a compliment to Good Y if an increase in the price of X yields a decrease in the price of Y.
Define a normal good in terms of the effect on demand for it if income rises.
As income rises so does the demand for a normal good.
Define an inferior good in terms of how demand for it is affected if income rises.
In income rises the demand for an inferior good decrease. In income decrease the demand for an inferior good rises.
What effect do substitutes and compliments have on the demand curve?
They both shift the demand curve.
With a linear demand curve, what type of good is it if the co-efficient on a price is positive?
That is a substitute.
What type of good has a negative co-efficient in a linear demand function?
That is a compliment.
Changes in price cause…
shifts along the demand curve.
Example of an inverse demand function…
p = 120 - 2Q
How would a price floor or price ceiling that confounds equilibrium from being achieved be described in this course?
As a “shortage” or “surplus”
What happens if the price floor is under the equilibrium?
Nothing
When is the slope also the price elasticity?
In an inverse demand function.
What do you need to estimate the elasticity of everywhere?
You need the price and the quantity.
If you’re given the equilibrium and the elasticity what can you find?
The slope. (know how to do this for exam!)
What are the four steps to finding an Equilibrium?
- ) Derive the individual supply and demand curves.
- ) Sum up individual curves to obtain market curves.
- ) Find the equilibrium price and market output levels.
- ) Find the individual production and consumption levels.
Will the price elasticity of demand always be negative?
Yes.
If elasticity > 0 then the good is///
a normal good
if elasticity
an inferior good
if cross price elasticity > 0
The good is a substitute.
if cross price elasticity
The good is a compliment
If the supply elasticity of demand > 1
The good is elastic.
If the supply elasticity of demand
The good is inelastic.
In Consumer Choice Theory axioms 1-3
Always Hold
In Consumer Choice Theory axioms 4-5
Almost always hold
The slope of the budget line is…
the Marginal Rate of Transformation
The Marginal Rate of Substitution is the slope of the …
indifference curve
The tricky thing with Marginal Rate of Substitution is..
the location of which is the numerator and which is the denominator.
When there is a rationing constraint then that introduces…
a kind and the policy implication is that we’ll see a lot of people at the kink.
MRS = MRT only if…
it’s an interior solution, which it will be w/ cobb-douglas, but not with substitutes.
Marginal Utility is…
the additional utility you get by increasing that good by one.
