Microeconomic Principles Flashcards
Explain the effect an income change might have on shifting the demand curve?
Lower income=less to spend in total=lower demand. …………Higher income=more to spend in total=raise demand.
What is the difference between a normal good and an inferior good? Explain.
Normal good- A good for which an increase in income leads to an increase in demand. Inferior good- a good for which an increase in income leads to a decrease in demand (car vs bus ride).
Explain how the price of related goods is related to changes in the demand curve?
When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes (yogurt for ice cream). When a fall in the price of one good raises the demand for another good, the two goods are called complements (hot fudge and ice cream).
If Luke and I are the only sellers of paper in a given market, and Luke drops his prices for paper, how will this impact the demand for my paper? Which way will the demand curve shift?
As Luke drops his price, your demand will decrease. Your demand curve will shift to the left.
What other factors might influence the position of the demand curve?
Price of the good itself, income, price of related goods, tastes, expectations, and number of buyers.
What numerical value determines whether or not a product/service is considered price elastic versus inelastic?
1 - Greater than or less than
What is income elasticity and how is it measured?
A measure of how much the quantity demanded of a good responds to a change in consumers’ income, computed as the percentage change in quantity demanded divided by the percentage change in income.
What is price elasticity of demand? Explain the distinctions between elastic, inelastic, and unit-elastic.
A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price. Elastic- Quantity moves proportionately more than the price (Price increase results in drastically lower demand). Inelastic- Quantity moves proportionately less than the price (Price increase results in slightly lower demand). Unit Elastic- Percentage change in quantity equals the percentage change in price.
What two results stem from income elasticity? Why is this important to an economist?
(1) Necessities, such as food and clothing, tend to have small income elasticities.(2) Luxuries, such as caviar and diamonds, tend to have large income elasticities.
What is cross-price elasticity? How is this defined and what result comes from this measure of elasticity?
A measure of how much the quantity demanded of one good responds to a change in the price of another good. Computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good. Substitutes=positive cross-price elasticity; complements=negative cross-price elasticity.
Can you summarize the 3 types of elasticity, their equations, purpose and outcomes?
(1) Price elasticity of demand - % chg in Q D / % chg in P (2) Income elasticity - % chg in Q D / % chg in income (3) Cross-price elasticity - % chg in Q D Good 1/% chg in Good #2 P
In the net, how are price (P) and quantity (Q) changed by a simultaneous increase in demand and supply?
Price increases and quantity is ambiguous. (Dependent upon how large of a shift in supply/demand)
In the net, how are price (P) and quantity (Q) changed by a simultaneous increase in demand and decrease in supply?
Price increases and quantity is ambiguous. (Dependent upon how large of a shift in supply/demand)
In the net, how are price (P) and quantity (Q) changed by a simultaneous decrease in demand and supply?
Price is ambiguous, quantity decreases.
In the net, how are price (P) and quantity (Q) changed by a simultaneous decrease in demand and increase in supply?
Price decreases, quantity ambiguous.
What is a market
A grouping of buyers and sellers
What is competition
Many buyers and sellers
No one seller or buyer has market power
No single buyer or seller can affect the equilibrium market price
Consumer demand
Utility: measure of happiness
Utility maximization: the idea that we all make choices that make ourselves the happiest that we can be
Diminishing marginal utility
The more you consume of a good, the less additional happiness you get from it
How much of a good will you consume
Until the marginal (added) benefit in the next until you consume equals the marginal cost (the price)
Law of demand
As price increases quantity demanded falls
Change in quantity demanded
A movement ALONG the demand curve
Change in demand
A shift of the ENTIRE demand curve
Change in quantity supplied
A movement ALONG the supply curve
Change in supply
A shift of the ENTIRE supply curve
Supply curve
Shows the relationship between the quantity supplied and the price
It represents the marginal cost of the production to the firm
The minimum price the firm can accept
Law of supply
As price increases the quantity supplied increases
*supply curve is always upward sloping
Equilibrium
Demand curve combined with supply curve. Equilibrium is where interception occurs and quantity supplied equals quantity demanded.
What if the price it too high for equilibrium?
More firms supply the good than consumers demand of the good.
Surplus
What if the price is too low for equilibrium?
More of the good is demanded by consumers than firms want to supply at that price.
Shortage
Increase in demand
Increase in equilibrium, price, and equilibrium quantity
Increase in supply causes
Decrease in equilibrium, price, and increase in equilibrium quantity
Decreases in demand
Decrease in equilibrium, price, and equilibrium quantity
Decrease in supply
Increase in equilibrium, price, and decrease in equilibrium quantity
Steps for simultaneous supply and demand shift
1) draw out each supply and demand graph
2) find out which effect (price or quantity) is the same and which is different
Substitute
2 goods which can do the same job or are similar and can be substituted for each other
Complements
Two goods which must be used together
Elasticity
Changes in the price of the good
Changes in the income of consumers
Changes in the prices of a related good
Changes to the price of the good equation
Price elasticity of demand= percentage change in quantity demand (divided by) percentage change in price
Measures the responsiveness of demand to changes in the price of the good
Income elasticity of demand equation
Percentage change in quantity demanded (divided by) percentage change in income
Measured the responsiveness of demand to change in consumer income
Percentage change in quantity demanded of good 1 (divided by) percentage change in the price of good 2
Measures the responsiveness of demand to changes in the price of a related good
