Exam 1 Flashcards
Price elasticity of demand
the percentage change in quantity demanded resulting from a 1 percent change in price.
Price elastic
if the elasticity of demand exceeds 1, Luxury goods
price inelastic
if the elasticity of demand is less than 1, necessity goods
unitary elasticity
if the elasticity of demand is equal to 1
price elasticity of supply
the percentage change in quantity supplied resulting from a 1 percent change in price
Price/market economic system
normative model 1) free play of market forces (supply and demand)
2) Complete private ownership of productive resources
3) Price/ARBITER in the market
4) Absence of Government intervention
Mixed economic system
1) Predominance of market forces (government intervention if needed; demand and supply forces are dominant)
2) Private Ownership
3) Price: dominant element (regulated)
4) Limited government intervention(as warranted/dictated by historical needs)
Command/Centralized economic system
1) Complete control of market forces (central planning entity has the command over everything)
2) Public ownership (state ownership)
3) Prices are fixed by the planners
Law of Demand
Given certain things unchanged or constant, an increase in the price of a good will lead to a decrease in the quantity demanded and vice versa
cross elasticity of demand
elasticity = percentage change in the quantity demanded of another good (Y) / Percentage change in the Price of one good (x)
Point elasticity of demand
1) entails an infinitely small change in the price of a good leading to a related infinitely small change in the quantity demanded.
2) Applicable to a linear or non-linear demand function
Formula: (change in quantity / change in price) * (Price / Quantity)
Income elasticity of demand equation
= % change in quantity demanded / % change in income
income elasticity of demand classifications
Positive income elasticity = Normal good: a good which is consumed more of as a sequel to an increase in income
Negative income elasticity = Inferior good: a good which is consumed less of as a sequel to increase income.
Engel Curve
Traces the relationship between the level of income and the quantity demanded of a good
Theory of Consumer Behavior
1) Consumer is given to rational behavior
2) consumer wants to maximize the total benefits out of the expenditure he/she makes toward the acquisition of a bundle of goods(subjective) ‘Max benefit’
3) Given an amount of benefit, consumer aim at minimizing the cost of the benefit derived. ‘ Mini Cost’
4) Min-max solution
