micro 1 Flashcards
What is the price elasticity of demand and supply?
The responsiveness of quantity demanded of a good to changes in its own price can be measured by the Price Elasticity of Demand (PED)
• PED = (% change in quantity demanded) /(% change in price)
Demand is said to be elastic is PED<1
Ineleastic if -1<ped></ped>
<p>PES is same but elast if PES>1</p>
<p>inelelastic if 0<pes>
</pes></p>
</ped>
What is a price ceiling?
What is a price floor?
What is the Rational agent model?
basic model for consumers in economics. two components
Consumer Tastes – Preference ordering over consumption bundles
• Consumer Opportunities – The possible consumption bundles that the consumer can afford to purchase
Explain consumer tastes
- A consumer’s tastes are conceived in terms of their preferences over pairs of consumption bundles
- By imposing various restrictions (axioms) on a consumer’s preferences we ensure that a consumer has a well-defined, consistent preference ordering over all consumption bundles
- A preference ordering is simply a ranking of all bundles from best to worst and thus summarises a consumer’s tastes
What are the axioms of choice?
What are the well behaved preferences?
Non-satiation (also called monotonicity) – Consumption bundle x’ is preferred to x’’ if x’ contains more of at least one good and no less of any other •
Strict Convexity – The ‘better-than’ set of any consumption bundle is strictly convex (or simply, “average bundles are preferred to extreme ones”)
What is the Cobb-DOuglas utility function?
What is an indiffernce curve?
Shows all the combinations of two goods between which a consumer is indifferent
What is the Marginal rate of subsitution?
Measures the rate at which a consumer is willing to substitute a small amount of one good for another
IS equal to the absolute value of the slope of an IC
What are perfect substitutes and perfect complements?
Two goods are perfect substitutes if the consumer is always willing to substitute one good for the other at a constant rate
Perfect complements are good that are always consumed together in fixed proportions
Explain normal, inferior, subsitute, complement oridnary and giffen goods
Normal - qDgoes up when income goes up
Inferior qD goes down when income goes up
Substitute- qd of x2 goes up when price of x1 rises
Compliment qd of x2 goes down when price of x1 rises
ordinary- If price goes down q demanded goes up
giffen- if price goes down, quantity demanded goes down
What is the subsitution effect?
The substitution effect (S), corresponding to the change in quantity demanded that results from the change in relative prices (with utility held constant)
What is the income effect?
The income effect (I), corresponding to the change in quantity demanded that results from the change in utility due to the price change (with relative prices held constant).
how do you depict subsitution effect and income effect graphically?
What is the marginal product of an input?
Explain returns to scale
What is the minimum efficient scale?
The MES of a firm is the level of output at which the (long run) AC curve reaches its minimum
What is an isocost line
shows combinations of inputs which have the same total cost (C)
What happens with cost minimisation in the short run?
