Microeconomics Flashcards
Equilibrium equation
Qd=Qs
What is comparative statics used for?
Comparative statics is used to analyse the effects of particular events on the market equilibrium.
PED Formula
PED = (% Change in Quantity Demanded)/(% Change in Price)
%Change = New-Old/Old
How do you calculate %Change?
New-Old/Old
What is a giffen good?
Giffen good is a product that people consume more of as the price rises and vice versa.
Factors affecting PED?
–Proportion of income devoted to the good.
–Availability of close substitutes.
–Definition of the market (shoes versus Adidas shoes).
–Time horizon. Most goods are more price elastic in the long run. However, for certain types of goods known as durable goods, the reverse is true. Why?
–Necessities versus luxuries.
Factors affecting PES?
–The time horizon. –Productive capability of the firm. –Size of the firm/industry. –Mobility of factors of production. –Ease of storing stock.
PES/PED are elastic when?
Value = >1
PES/PED are inelastic when?
Value = <1
Price tends to be more volatile when the elasticity is?
If a product has a very inelastic supply or demand, its price will tend to be more volatile.
How do you calculate PES?
PES = (% Change in Quantity Supplied)/(% Change in Price)
%Change = New-Old/Old
How do you calculate XED?
XED = (% Change in Qd of good B)/(% Change in Price of good A)
If XED is positive, the goods are?
Substitutes
If XED is negative, the goods are?
Complements
How do you calculate YED?
YED = (% Change in Quantity Demanded)/(% Change in Income)
If YED is positive, the good is?
Normal
If YED is negative, the good is?
Inferior
What is utility measured on?
An ordinal scale. E.g. –“I prefer Xbox over PlayStation”. All it cares about is the order.
What is the difference between an ordinal scale and a cardinal scale?
A cardinal scale is concerned with the magnitude as well as order. E.g. I prefer Xbox 10 times more over PlayStation.
How do you calculate the price ratio?
It is the price of the good on the horizontal axis divided by the price of the good on the vertical axis
How is the Marginal Rate of Substitution calculated?
How many A you’re giving up/How many B you’re getting.
MRS = MuA/MuB
Define Axiom of Comparison
Axiom of Comparison: The consumer is able to compare any two bundles. The consumer can state that A is preferred to B, B is preferred to A, or that they are indifferent between the two.
Define Axiom of Transitivity
Axiom of Transitivity: If Bundle A is preferred to Bundle B and Bundle B is preferred to Bundle C, the Bundle A must be preferred to Bundle C.
The slope of the budget constraint is given by the…?
Price Ratio