Midterm 1 Flashcards
Positive Analysis
Statements about how the world is
Normative Analysis
A value judgement that is subjective, how the world should be
Regression Analysis
method of using data to determine the effect of one or more variables on another
Choke Price
The price at which quantity demanded is equal to zero. The constant in an inverse linear demand curve
Reservation Price
The highest price a person is willing to pay and still purchase the good.
Ceteris Paribus: What are 5 conditions that will shift Demand?
1) Consumer’s Income,
2) Price of related goods,
3) tastes/quality,
4) consumer expectations,
5) number of buyers
Ceteris Paribus: What are 4 conditions that will shift Supply?
1) Input prices
2) Production technology
3) Producer expectations
4) Number of sellers
Own-Price Elasticity
quantity demanded of good x to a change in the price of good x
When is a good perfectly inelastic?
When the change in price has zero affect on quantity demanded
When is a good inelastic?
When the percentage change is between 0.0 < |E| <1.0
When is a good unit elastic?
When percentage change equals 1
When is a good elastic?
When percentage change is larger than 1, 1.0 < |E| < infinity
When is a good perfectly elastic?
When the percentage change is infinite
What type of elasticity is it when a good has a vertical demand?
Perfectly inelastic
What type of elasticity is it when a good has a horizontal demand?
Perfectly elastic
Is expenditure and revenue the same? (Yes or no)
Yes
Expenditure = ?
Price * Quantity
In an elastic region of a demand curve, a price _______ will cause expenditure to _________?
increase; decrease
or
decrease; increase
In the inelastic region of a demand curve, a price ______ will cause expenditure to _______?
increase; increase
or
decrease; decrease
What is cross-price elasticity of demand?
quantity demanded of good X to a change in price of good Y
What is income elasticity of demand?
quantity demanded of good X to a change in income
What is Market Bundle?
List with specific quantities of one or more goods
What is completeness?
Consumers can compare and rank all possible bundles
What is Indifference?
When a consumer is equally happy with either of two bundles
What is transitvity?
If A is preferred to B and B is preferred to C, then A will be preferred to C.
What is “More is Better than Less”?
Bundle A or Bundle B the same but Bundle A has one more good so Bundle A is automatically better
What is Perfect Substitutes?
Two goods for which the marginal rate of substitution of one for the other is constant
What is Perfect Complements?
Getting more of one good will not increase utility unless it comes with an increase in other good as well. Two goods for which the marginal rate of substitution is either zero or infinite
U = 2X + Y; what would happen if MRSxy > MktRSxy?
Will give up more for good X, buying good X increases their utility
U = 2X + Y; what would happen if MRSxy < MktRSxy?
Will give up less for Good X, buying Good X decreases their utility
What term is this?
The rate at which one good can be traded for another; the absolute value of the slope of the budget line.
Market Rate of Substitution
What term is this? The rate at which a consumer is willing to substitute one good for another and still maintain the same level of satisfaction.
Marginal Rate of Substitution
An economic model will…
… make assumptions that ignore some aspect of the real world 
What is diminishing marginal rate of substitution? 
As the consumer obtains, more of good X, the amount of good Y she is willing to give up for another unit of good X decreases
Marginal
The change in some variable
Elements of a theory (3 elements)
Simple, general, useful
When quantity supplied is a function of price?
Supply function
When price is a function of quantity supplied?
Inverse supply function
What is a leftward shift of a curve?
Contraction
What is a rightward shift of a curve?
Expansion
Occurs when quantity supplied is greater than quantity demanded
Surplus
Occurs when quantity demanded is greater than quantity supplied
Shortage
The constant in an inverse linear demand curve
Choke Price
A principle that explains some phenomenon
Theory
A statistical analysis that uses data to create a line-of -best-fit
Regression
The cross-price elasticity of a complement is ______. The income elasticity of an inferior good is _______.
Negative; negative
When the consumer will choose to spend their entire budget on only Good X or Good Y whichever brings highest utility
Corner solution
