Determinants of Elasticity, Cross Elasticity and Income Elasticity Flashcards
the availability of substitutes, the more elastic is the product’s demand
substitutability
the closer the substitutes
the more elastic is the demand
proportion of income
larger the expenditure relative to an individual’s budget, the more elastic the demand because the buyers notice the change in price more
demand for low-priced goods is
relatively inelastic
demand for high-priced goods is
relatively elastic
less necessary the item
the more elastic is the demand
cross elasticity of demand
is a measure of the responsiveness of demand for a good to a change in the price of a substitute or a complement, other things remaining the same
substitute goods
goods that can replace each other
complementary goods
goods frequently consumed in combination
income increases
more money to spend, demand for goods will shift rightward
income elasticity of demand
measures degree to which consumer respond to a change in their income by buying more or less of a particular good
normal good
demand for more of a good when you make more money
inferior good
demand for less of a good when income increases
law of supply
an increase in price causes an increase in quantity supplied
short run
fixed capacity for producers
long run
firms can make resource adjustments necessary—more firms can enter or leave market
utility
amount of satisfaction or benefit a person receives from the consumption of a good or service
utility theory
the more pleasure we get from a product, the higher the price we’re willing to pay for it
total utility or benefit
satisfaction received from the consumption of a series of products
marginal utility
extra satisfaction derived from 1 additional unit of a specific product
marginal utility theory
assumes people chooses the consumption possibility that maximizes their total utility
law of diminishing marginal utility
successive units of a product yield smaller and smaller amounts of marginal utility so the consumer will buy more only if P falls
goal of consumer
maximize total utility
consumer equilibrium
no incentive exits to alter expenditure pattern unless tastes, income or prices change
Thorstein Veblen
spending of money for and the acquiring of the luxury goods and service to publicly display economic power, either the buyer’s income or the buyer’s accumulated wealth
consumer surplus
a person high up on the demand curve is willing to pay a lot for a good
market price
what each will actually pay (or not pay)
price discrimination
the sale of an individual good at different prices to different consumers
indifference curve
a curve depicting alternative combinations of goods that yield equal satisfaction
indifference curve
deals with all combinations of goods
