Lecture 3 (Elasticity & decision making)

Question 1

What does Price elasticity of demand measure?

Answer 1

How much the demand reacts to a price change

Question 2

PEoD (Price elasticity of demand) formula

Answer 2

|(ΔQd/ΔP)(P/Qd)| or |(dQd/dP)(P/Qd)|

Question 3

Income elasticity of demand of normal vs inferior goods

Answer 3

For normal goods IEoD > 0,
for inferior IEoD < 0

Question 4

cross elasticity of demand used for?

Answer 4

measures effect of a change in one good’s price on the quantity demanded of another good

Question 5

CEoD (cross elasticity of demand) formula

Answer 5

CEoD = (dQd[A]/dP[B]) * (P[B]/Qd[A])

Question 6

Elastic demand PEoD value

Answer 6

PEoD > 1 (demand changes are stronger than the price changes)

Question 7

Inelastic demand PEoD value

Answer 7

0 < PEoD < 1 (demand changes weaker than the price changes)

Question 8

Unit-elastic demand PEoD value

Answer 8

PEoD = 1 (demand changes are exactly equal to the price changes)

Question 9

Perfectly elastic demand PEoD value

Answer 9

PEoD = ∞ (demand changes to completely 0 if the price changes at all)

Question 10

Perfectly inelastic demand PEoD value

Answer 10

PEoD = 0 (demand does not change if the price changes)

Question 11

How to tell if goods are substitutes or complements by CEoD?

Answer 11

Goods are substitutes - CEoD > 0
Good are complements - CEoD < 0

Question 12

What are the Influencial factors on elasticity:

Answer 12

-Variety of substitutes
-Brand vs Market - brand is more elastic than the whole market
-Necessity goods - less elastic than luxury goods
-Proportion of income spent on the good
-Long-run/short-run goods and changes

Question 13

What are Marginal costs

Answer 13

cost of producing/consuming an extra amount of smth

Question 14

Marginal costs formula

Answer 14

MC = ΔTC/ΔQ

Question 15

Marginal benefits meaning

Answer 15

benefit of producing/consuming an extra amount of smth

Question 16

Marginal benefits formula

Answer 16

MB = dTB(x) / dx

Question 17

Sunk cost meaning

Answer 17

cost that has already been incurred and is nonrecoverable (it should be ignored in decisions)

Question 18

Present value meaning

Answer 18

method to asses future income streams

Question 19

Present value formula

Answer 19

PV = X/(1+r)^N

X - amount of money in the future
r - return rate
N - years

Question 20

midpoint method used for?

Answer 20

technique for calculating the percent change in the price of a good or quantity supplied or demanded

Question 21

Midpoint method formula

Answer 21

change of X / Average of X *100%