Micro- D, S, Consumer Flashcards
Define demand
the quantity of a good or service that buyers (consumers) are
willing and able to buy at any given price (in a given time period)
Define supply
the quantity of a good or service that sellers (
rms) are willing and
able to sell at any given price (in a given time period)
Define a market
a set of arrangements by which buyers and sellers are in contact to voluntarily exchange goods or services, prices indicate availability and desire for resources
Define the equilibrium price
the price at which quantity demanded equals quantity
supplied
Name 5 determinants of Quantity demanded
Price, tastes, income, substitute and complimentary goods
Define price elasticity of demand
The responsiveness of quantity demanded of a good to changes in its own
price
%change In Qd / %change in Price
What values of price elasticity of demand is elastic, inelastic and unit elastic
Elastic is
Name 4 determinants of supply
Price, technology, cost of production inputs (labour and raw materials), gov regulation (taxes, subsidies etc)
Define price elasticity of supply
The responsiveness of quantity demanded of a good to changes in its own
price
What is a price ceiling
A maximum legal price that sellers can charge
Imposed to the benefit of buyers
What’s a price floor
A minimum legal price that sellers can charge
Imposed to the benefit of sellers
What’s a consumption bundle
A consumption bundle is simply a collection of particular quantities of
di¤erent goods
What are the two axioms of rational preference
Completeness (consumer can’t have no opinion) and Transitivity (ranking must be internally consistent, no cycles)
What’s weak monotonicity
when a consumer/agent prefers all consumption bundles that have more
of every good.
What’s strong monotonicity
when a consumer/agent prefers all consumption bundles that have more
of at leas5 one good and at least equal amounts of the other goods
What’s local non-satiation
Consumer cant prefer a particular amount of a good, must prefer either less or more
What is convexity
any two bundles that are each viewed as being at least as good as a third bundle, a weighted average of the two bundles is viewed as being at least as good as the third bundle.
“averages are better than the extremes”. The concept roughly corresponds to the concept of diminishing marginal utility
What is strict convexity
for any two distinct bundles that are each viewed as being at least as good as a third bundle, a weighted average of the two bundles (including a positive amount of each bundle) is viewed as being strictly better than the third bundle.
“averages are better than the extremes”. The concept roughly corresponds to the concept of diminishing marginal utility
What’s the Marginal rate of substitution
The marginal rate of substitution (MRS) measures the rate at which a
consumer is willing to substitute a small amount of one good for another
Equal to gradient of an IC (indifference curve)
When is the MRS constant
Substitute goods, always willing to sub one good for the other.
What is the condition for the optimum consumption bundle
Where the MRS (gradient of IC) is equal to the price ratio (which gives gradient of budget line)
Known as the tangency condition
As this puts consumer of highest IC for their given income
What’s an ordinary good
a good for which quantity demanded rises as its own
price falls
Demand curve slopes downwards
What’s a Giffen good
a good for which quantity demanded falls as its own price falls
An extremely inferior good, as its income effect is so strong that it outweighs its substitution effect
Real life examples are v hard to find!
Demand curve slopes upwards
What are the two effects that effect the quantity demanded of a good when it’s price changes
The substitution effect and the income effect.
What’s the substitution effect
the change in quantity
demanded that results from the change in relative prices
Shown graphically as a shift along the ORIGINAL IC due to the change in slope of the BL.
Always in the direction of the price change
What’s the income effect
the change in quantity demanded that results from the change in purchasing power due to the price change
Shown graphically as a shift from the position on the old IC with the new BL to a new IC with this new BL
Can be either in or against the direction of the price change. Normal good= same direction as price change (consumption increases with increasing income) and opposite for inferior goods.
