Econ:Elasticity and Conumer Choice Flashcards

0
Q

Elasticity

highly Elastic

A

very responsive (sensitive)

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1
Q

Elasticity

A
  • Measure of responsiveness
  • Degree of sensitivity
  • Measures how change in one variable affects another variable
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2
Q

Elasticity

low elastice

A

not quite responsive (not very sensitive) ; inelastice

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3
Q

Price Elasticity of Demand (Ep)

A
  • the responsiveness of Qd of a commodity to the changes in its Price
  • how a consumer responds to a price change
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4
Q

Elastic Demand

A

Very responsive (sensitive)

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5
Q

Inelastic Demand

A

Not very responsive (sensitive)

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6
Q

Elasticity is: (4)

A
  1. unit free measurement
  2. always analyzed in absolute terms
  3. Ep > 1 Elastic Demand
    Ep < 1 Inelastic Demand
  4. calculate using midpoint formula
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7
Q

Ep > 1

A

% change Qd > % change P
Elastic
Relatively flat; more horizontal, the flatter the demand, the more elastic the demand

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8
Q

Ep < 1

A
% change Qd < % change P
Inelastic
The steeper (vertical) the demand, the more inelastic the demand
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9
Q

Extreme Cases of Price Elasticity of Demand (3)

A
  1. perfectly elastic demand
  2. perfectly elastic demand
  3. unit elastic demand
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10
Q

Perfectly Inelastic Ep

A

buyer does not respond to any price change
Ep=0
buyer will always purchase a fixed quantity
Demand curve is vertical

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11
Q

Perfectly Elastic Demand Ep

A
Infinite elasticity 
Ep= infinity
extremely sensitive to price changes
any price below P : buyer purchases extremely large Q
any price above P : buyer purchases 0 Q
Demand curve is horizontal
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12
Q

Unit Elastic Demand Ep

A

% change Qd = % change P
Ep=1
fixed budget
total revenue remains constant

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13
Q

Determinate’s of Ep (4)

A
  1. The availability of substitute goods
  2. The percent of the budget the good takes
  3. Passage of Time
  4. The nature of the good
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14
Q

Determinate of Ep : The availability of substitute goods

A
  1. more available substitute–> more Elastic Demand
    a lot of types of substitutes
  2. less available substitute–> more Inelastic Demand
    not a lot of types of substitutes
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15
Q

Determinate of Ep : The percent of the budget that good takes

A
  1. greater %budget good takes–> more Elastic Demand

2. less %budget good takes–> more Inelastic Demand

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16
Q

Determinate of Ep : Passage of Time

A
  1. more time buyer has to adjust to P change–> more Elastic Demand
  2. less time buyer has to adjust to P change–> more Inelastic Demand
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17
Q

Determinate of Ep : The nature of the good

A
  1. luxury good–> Elastic Demand

2. Necessity good–> Inelastic Demand

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18
Q

Elasticity of Demand Ep and Total Revenue Test

A

Firm tries to predict how a price change effects the total revenue
TR = P x Q
TR = price per unit x number of units

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19
Q

Rules for the Total Revenue Test (3)

A
  1. Elastic Demand
  2. Unit Elastic Demand
  3. Inelastic Demand
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20
Q

Rules for Revenue Test : Elastic Demand

A

Ep > 1
inverse relationship
change P decreases change in TR increases

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21
Q

Rules for the Total Revenue Test : Unit Elastic

A

Ep=1
change P increases; TR– no effect
change P decreases; TR– no effect

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22
Q

Rules for Total Revenue Test : Inelastic Demand

A

Ep < 1
direct relationship
change P increases ; change TR increase
change P decreases ; change TR decreases

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23
Q

Ep looks at?

A

movement along a stationery demand curve.

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24
Cross Price Elasticity (CO)
measures responsiveness of the buyers to change in P of related goods
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Exy
x ; how quantity of x is related to price of y | y ; price of related goods
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Exy > 0
(+) substitute | larger the # is (+) the more indicates its a substitute
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Exy < 0
(-) compliment | the larger the # is (-) the more it indicates its a compliment good
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Income Elasticity of Demand
Ei= % change Qd / % change Income
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Ei > 0
(+) normal good | 2 types of normal goods
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Ei > 0 and Ei > 1
normal, luxury good income elastic buyer sensitive to change in income
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Ei < 0
(-) inferior good
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Ei > 0 and Ei < 1
(+) normal good ; necessity income inelastic buyer not quite sensitive to change in Income
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Ei = 0
unrelated good
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Demand Summary | 3 measures of responsiveness
1. price elasticity of demand (Ep) 2. cross price elasticity (Exy) 3. income elasticity (Ei)
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Supply Elasticity
how responsive supply/producer is to a given change in price.
36
Es > 1
elastic supply % change Qs > % change P supply curve is flat
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Es < 1
Inelastic supply % change Qs < % change P supply curve is more steep/vertical
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Extreme Elasticities of Supply (3)
1. perfectly inelastic supply 2. perfectly elastic supply 3. unit/unitary elastic supply
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Extreme Elasticity: perfectly inelastic supply
Es=0 perfectly vertical supply curve change P increase/decrease; Qs--> no effect no sensitivity to change in P
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Extreme Elasticity of Supply: perfectly elastic supply
``` Es= infinite extremely sensitive to any P change increase in P - extremely large Qs decrease in P - 0 Qs perfectly horizontal supply curve ```
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Extreme Elasticity of Supply: Unit/Unitary Elastic
Es=1 % change Qs = % change P 45 degree angle to supply curve
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Determinate's of Es | definition
factors that cause a supplier to be elastic or inelastic to a given price change.
43
Determinate's of Es (2)
1. Time to adjust to P change | 2. Availability of inputs used in production
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Determinate of Es : Time to adjust to change in P
1. more time to adjust to change P more elastic supply; long-run 2. less time to adjust to change P more inelastic supply: short-run
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determinate of Es : availability of inputs used in production
substituting one good for another 1. more substitute inputs - more elastic supply 2. less substitute inputs - more inelastic supply
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Consumer Choice
model of consumer decision making
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Utility Theory
one theory of consumer choice
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Utility Theory : Assumption
Goal of consumer is to maximize utility
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Utility definition (3 things)
1. subjective measure of consumer satisfaction 2. enjoyment, satisfaction, and pleasure a consumer receives from consuming; purchasing good/service 3. no 2 people have the same utility
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Util definition (3)
1. 1 unit of utility 2. subjective measure of utility 3. hypothetical
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Total Utility (TU)
the cumulative satisfaction from consuming all units of a good.
52
Marginal Utility (MU)
the extra/additional satisfaction from consuming one additional unit of a good
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Utility Schedule (2 things)
1. subjective measure of satisfaction 2. depends on taste/preference for good. Economic Decisions are made at the Margin
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(+) MU increasing
TU increasing at a fast rate
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(+) MU decreasing
TU still increasing
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MU=0
TU increasing at slow rate; maximized in theory - as more of good is consumed, eventually each additional unit is less and less satisfying - area of diminishing return - CAUTION: signal to buyer; you are approaching utility maximization.
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MU=0 and TU
TU Maximized = Consumer Choice
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MU = -1
(-) MU ; TU decreases | a rational consumer will NEVER consume the good.
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Summary of marginal Analysis (5)
1. as you consume more of a good generally TU increases. Q increases TU increases 2. as long as MU increases TU increases 3. as you consume more of a good MU eventually declines approaching consumer choice. increase Q decrease MU 4. when MU=0 TU is maximized ; consumer choice 5. when MU (-) TU decreases; rational consumer will NOT consider.
60
Consumer Optimization (CO)
1. maximizes utility given the consumer's limited income. 2. they have a budget 3. choice set of goods/service that maximizes consumer utility given the consumer's income and prices of each good.
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CO rules for 2 good case (2)
1. equate MU/P= MU per dollar for each good. | 2. always select additional units of a good that has the highest MU/P until all income is spent; zero income
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2 effects on Consumer Optimum
1. substitution effect of a P change | 2. income effect of a P change
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2 effects on CO : substitution effect a price change
a change in P that causes the consumer to substitute cheaper goods for relatively more expensive goods
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effect on CO : income effect of a P change
a change in P that effects the purchasing power of the buyer's money/income Inflation ruins purchasing power
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Price (5)
1. an objective measure of buyer's preference of a good 2. measures the value for additional units of a good consumed 3. measures additional utility from consuming additional units of a good. 4. better indicator of consumer performance than MU because P is objective 5. best indicator of value
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MU
1. a subjective measure of buyers preference for additional units of a good. 2. closest measure in real world that you can get for MU is P
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MU=P
Q increases P decreases MU decreases | Q decreases P increases MU increases
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Consumer Surplus (CS)
a measure of Total Utility (TU)
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Consumer SP (2 things)
1. The area below the demand curve above the price. | 2. The difference between what a consumer is willing to pay and what they actually pay
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Consumer Surplus: The difference between what a consumer is willing to pay and what they actually pay.
1. Water Large TU > MU small : large supply; small demand 2. Diamonds Small TU < MU large : small supply; large demand