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Economics 214 > Individual and market demand > Flashcards

Individual and market demand Flashcards

1
Q

Price-consumption curve (PCC)

A

Holding income and the price of Y constant, the PCC for a good X is the set of optimal bundles traced on an indifference map as the price of X varies

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2
Q

Moving from the PCC to the individual’s demand curve

A

Table and then plot the different price-quantity combinations from the PPC

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3
Q

Income-consumption curve (ICC)

A

Holding the prices of X and Y constant, the ICC for a good X is the set of optimal bundles traced on an indifference map as income varies

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4
Q

Engel curve

A
  • A curve that plots the relationship between the quantity of X consumed and income
  • Plots the quantities of X on the ICC against the corresponding values of income
  • Can be backward bending when changing from a normal good to an inferior good as income rises
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5
Q

Normal good

A

A good whose quantity demanded rises as income rises (positive sloping Engel-curve)

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6
Q

Inferior good

A

A good whose quantity demanded falls as income rises (negative sloping Engel curve)

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7
Q

Substitution effect

A

That component of the total effect of a price change that results from the associated change in the relative attractiveness of other goods

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8
Q

Income effect

A

The component of the total effect of a price change that results from the associated change in the real purchasing power

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9
Q

Graphs p 99

A

Graphs p 99

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10
Q

Giffen good

A
  • A good whose quantity demanded rises as its price rises
  • Inferior good whose income effect is stronger than its substitution effect
  • Has to account for a large part of the consumers’ budget
  • Has to have a relatively small substitution effects
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11
Q

Price insensitive good

A
  • Eg salt
  • No close substitutes (represented by indifference curves with a nearly right-angled shape)
  • Negligible budget share (intersect between indifference curves and budget line near Y-intersect of budget line
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12
Q

Income and substitution effects of a price sensitive good

A
  • Eg housing
  • Close substitutes available (Smooth convex shaped indifference curve)
  • Large budget share
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13
Q

Aggregation of individual demand curves

A

Horizontal summation to get the market demand

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14
Q

Price elasticity of demand

A

The percentage change in the quantity of a good demanded that results from a 1 percent change in its price

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15
Q

Elasticity of demand formula

A

E = dQ/Q / dP/P

E = dQ/dP * P/Q

E = P/Q * 1/slope

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16
Q

Elastic demand

A

E > 1

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17
Q

Inelastic demand

A

0 < E < 1

18
Q

Unit elastic demand

A

E = 1

19
Q

Perfect elastic demand

A

E = infinity

20
Q

Perfect inelastic demand

A

E = 0

21
Q

How to increase total revenue

A

Elastic demand - decrease prise

Inelastic demand - increase price

Unit Elastic demand - keep price the same

22
Q

Elasticity and tax income

A
  • It make more sense to levy a tax on a product with an inelastic demand because
  • the consumers pay the burden of the tax more
  • the government collects more tax income
  • the deadweight loss is smaller
23
Q

Determinants of price elasticity of demand

A
  • Availability of substitutes (substitute effect is smaller if less substitutes are available)
  • Budget share (Income effect is bigger if the good forms a bigger part of the budget)
  • Direction of income-effect (normal or inferior good)
  • Time (eg fuel price inelastic over short term and more elastic over long term as driver switch to other modes of transport)
24
Q

Constant elasticity demand curve

A

P = k / Q^(1/E)

25
Q

Segment ratio method

A

abs(Ec) = EC/AC

26
Q

Income elasticity of demand

A

The percentage change in the quantity of a good demanded that results from a 1 percent change in income

27
Q

Income elasticity of demand formula

A

n = dQ/Q / dY/Y

n = dQ/dY * Y/Q

n = P/Q * 1/slope of Engel curve

28
Q

Luxury good

A

n > 1

29
Q

Necessity

A

0 < n < 1

30
Q

Inferior good (income elasticity)

A

n < 0

31
Q

Cross price elasticity of demand

A

The percentage change in the quantity of one good demanded that results from a 1 percent change in the price of the other good

32
Q

Cross price elasticity of demand formula

A

Exz = dQx/Qx / dPz/Pz

Positive = substitutes

Negative = compliments

33
Q

Slide 38 & 39

A

Look at

34
Q

Bandwagon effect

A

The desire to have a good because almost everybody else has it

Makes the demand curve more elastic

35
Q

Snob effect

A

The desire to have a good because not a lot of people own it

Makes the demand curve less elastic

36
Q

Intertemporal consumption bundles

A

Consumers choose between their current and future consumption

Max future consumption
= M1(1+r) + M2 (y-intersect)

Max current consumption
= M1 + PV(M2) (X-intersect)

Slope = -(1+r)

37
Q

Marginal rate of time preference (MRTP)

A

The number of units of consumption in the future a consumer would exchange for 1 unit of consumption in the present

Slope of the intertemporal indifference curves

MRTP = dFuture/dCurrent

38
Q

Positive time preference

A

MRTP > 1

39
Q

Negative time preference

A

MRTP < 1

40
Q

Neutral time preference

A

MRTP = 1

41
Q

Patient and impatient consumer

A

Patience - postpone consumption

Impatience - Consume much now

42
Q

Network externality

A

A network externality exists when a person’s demand for a specific good does not only depend on their own demand for that good, but also on their perception of how many other people own that good

Economics 214 (15 decks)

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