II.A 1-6 Flashcards
what is demand?
the want to purchase goods or services
-people must be willing and able to purchase a good service
the law of demand states that
as the price of good ____, the quantity demanded ______
(two sentences from this)
- as the price of good increases, the quantity demanded decreases
- as the price of good decreases, the quantity demanded increases
what type of relationship is the law of demand?
inverse
demand vs. quantity demanded?
demand-willingness and ability to buy
*quantity demanded- the # of units purchased
law of diminishing marginal utility
as a person consumes additional units of a good, eventually the utility gained from each additional unit of the good decreases
utilty
the amount of satisfaction for and object
the more utility you get from a good the higher the price you are willing to pay for it. True?
true!
what is the difference in a change in demand and a change in quantity demanded?
- change in demand- the physical movement of the whole demand line
- a change in the point of the demand line
what are the 6 factors that shift the demand curve?
- income
- substitutes
- complements
- preferences
- number of buyers
- expectations of future price change
as the number of buyers increase, the demand for a good _____
increases
normal good
the demand for normal goods rises as income rises and falls as income falls
inferior good
the demand for inferior goods rises as income falls and falls when income rises
neutral goods
the demand for neutral goods remains the same as income rises and falls
why is the demand curve downward sloping? (3 reasons)
- income effect-if a product’s price falls, the purchasing power of a consumer will increase, and therefore, there will be greater quantity demanded at lower prices; the inverse (higher prices—>less quantity demanded) is also true.
- Substitution effect - if the product price is lower, consumers will shift from purchasing a substitute (a similar product) to buying more of this particular product, therefore, the quantity demanded is higher at lower prices.
- Diminishing MU - the more additional units a consumer buys of a good, the less marginal utility they receive from it (they are less happy with buying each new one). So to make them buy more of what they are already buying, you have to lower the price.
when you are talking about price you are talking about….
change in quantity demanded
supply
willingness and ability to produce something at a given range of prices
law of supply
“as prices _____ the quantity supplied _____”
(2 possible outcomes)
- as prices rise, the quantity supplied increases
2. as prices fall, the quantity supplied decreases
what changes the supply curve to the left or right? (7 things)
- cost of inputs
- technology (new machines)
- productivity (efficiency increases)
- taxes and subsidies
- expectations of future price change
- govt regulations
- number of sellers
price ceiling
maximum legal price a seller can charge for a product
-goal: make affordable by keeping price from reaching equilibrium
price floor
minimum legal price a seller can sell a product.
-goal: Keep price high by keeping price from falling to equilibrium
allocatively efficient
society is properly using their resources
social optimal
what do price floors and ceilings do to how efficient a market is?
it makes deadweight loss
how do you find the elasticity for demand?
%change in quantity demanded/ %change in price
if the result of the equation to find elasticity for demand is…
Ed > 1 =…
Ed less than one …
Ed equal to one…
- elastic
- inelastic
- unit elastic
how do you find the elasticity for supply?
%change in Quantity supplied/ %change in price
if the result of the equation to find elasticity for supply is…
Es > 1 =…
Es less than 1…
Es equal to 1
- elastic
- inelastic
- unit elastic
how do you find income elasticity?
%change in quantity demanded/ %change in income
if the result of the equation to find income elasticity is…
Ei > 0 = positive…
Ei less than zero or negative….
- normal good
2. inferior good
what is the equation to find cross-price elasticity?
%change in quantity demanded of good x/ %change in price of good y
if the result of the equation to find cross-price elasticity is…
Exy > 0 = positive =….
Exy less than zero or negative…
- substitutes
2. complements
how do you find total revenue?
price * quantity
TOTAL REVENUE TEST
- P increases, TR increases =…
- P decreases, TR decreases =…
- P increases, TR decreases =…
- P decreases, TR increases =….
- inelastic
- inelastic
- elastic
- elastic
what are the determinants of inelastic demand? (7)
- elasticity coefficient less than 1
- no/ few substitutes
- small percent of income
- no time to shop
- need
- price increases causes TR to increase
- price decreases causes TR to decrease
what are the determinants of elastic demand (7)
- elasticity coefficient >1
- many substitutes
- big % of income
- time to shop around
- want or luxury
- P increases, TR decreases
- P decreases, TR increases
elasticity
how sensitive quantity is to a change in price
elasticity of demand
measurement of consumers’ responsiveness to a change in price
inelastic demand
insensitive to a change in price
-if price increases, quantity demanded will fall only a little per se because people still need the certain good
elastic demand
quantity demanded is sensitive to a change in price
-if price increases, quantity demanded will fall a lot per se because people don’t really need this good and it is more of a luxury
why impose a excise tax?
- discourage consumption
- redistributive goals
- reduce negative externality
what does tax burden depend on?
the elasticity of supply or demand
what does a per unit tax do?
increases the marginal cost of producing each product
