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MicroEcon Section 2 > Section 2.1 > Flashcards

Section 2.1 Flashcards

1
Q

What is the Budget Equation and what does it tell us?

A

The budget equation is Px(Qx) + Py(Qy) = Y P = Price Q = Quantity Y = Total Income. It tells us that we are always going to buy goods equal to out total income

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2
Q

What effect does the change of price in a good have?

A

If the price of one good goes up and everything else is held constant then the price of everything else went down IN REGAURDS TO THE FIRST GOOD.

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3
Q

What is real Income

A

Real income is our income expressed as a quantity of goods that you can buy. What purchasing power our income has.

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4
Q

What is Relative Price? And how is it shown on the budget line?

A

The price of a good divided by the price of another good. Shown by the steepness of the budget line.

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5
Q

What makes the Budget Line Pivot?

A

When the price of one good changes

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6
Q

What makes the Budget Line Shift?

A

When our income increases the BL shifts rightward; When our income decreases the BL shifts leftward.

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7
Q

What is an Indifference Curve? And what does it say about utility?

A

A line that shows the combination of goods among which the consumer is indifferent _ You have the same utility no matter where you are on the Indifference Curve.

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8
Q

What are the Four Properties of Preference Ordering?

A
  1. Completeness _ You can order all the bundles 2. More is better - We prefer more to less 3. Transitivity - If A > B and B > C then A > C 4. People like Mixtures - People want a few of both goods rather then all of one good
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9
Q

All combinations of goods can be put into three groups, what are the three groups?

A

Preferred, Less Preferred and Indifferent

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10
Q

What is a Preference Map?

A

Series of Indifference Curves

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11
Q

What is the Marginal Rate of Substitution (MRS) and how is it shown on the indifference curve?

A

The rate that you will give up good Y to get an additional unit of Good X while remaining on the same indifference curve. The magnitude of the slope of the indifference curve measures the MRS

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12
Q

What does Diminishing Marginal Rate of Substitution tell us about the choices someone will make?

A

The tendency of a person to be willing to give up less of good Y to get one more unit of good X

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13
Q

How can we find the Best Affordable Choice?

A

Its on the Budget Line, on the highest attainable indifference curve and has a MRS between the two goods that is equal to the relative price of the two goods.

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14
Q

Graphically, how do you find the best affordable choice?

A

The budget line is compared to the indifference map to find the point at which the budget line intersects the greatest possible indifference curve. We want to find the point at which the slope of the MRS is equal to slope of the budget line.

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15
Q

What is Demand and how does it compare to want?

A

If you demand something you must want it, be able to afford it and have made a definite plan to buy it. Wants are unlimited, demands reflect a decision.

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16
Q

What is Quantity Demanded?

A

The amount of a good or service that a person intends to buy at a particular point on the demand curve.

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17
Q

What is the relationship between demand and quantity demanded? How is it shown graphically?

A

Demand refers to the entire relationship between the price of the good and the quantity demanded of the good. A change in price of good X does not affect the demand of good X, it only changes the quantity demanded.

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18
Q

What is the Demand Curve?

A

The graphing of the information we get when figuring out the demand.

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19
Q

The willingness and ability to pay tell us?

A

The willingness to pay measures the marginal benefit. Your willingness to buy another unit of good X based on how much it costs.

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20
Q

What is Value?

A

What we get. We measure value as the max price that a person is willing to pay.

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21
Q

What is Price?

A

What we pay

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22
Q

What is Marginal benefit?

A

The value of one more unit of a good or service

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23
Q

What is the Law of Demand?

A

The higher the price of a good, the lower the quantity demanded.

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24
Q

What is the Price Effect?

A

The effect of a change in the price of a good

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25
Q

What is The Law of Demand?

A

The higher the price of a good, the smaller the quantity demanded; The lower the price of a good, the higher the quantity demanded, all other things remaining the same

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26
Q

The Law of Demand results from:

A

The Income Effect and The Substitution Effect

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27
Q

What Six Things Shift The Demand Curve?

A

Income Price of Relative Goods Expected Future Prices Expected Future Income and Credit Population Preferences

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28
Q

How does Income affect the demand curve?

A

When income increases, consumers buy more of normal goods and the demand curve shifts rightward.

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29
Q

What is a Normal Good?

A

A normal good is one for which demand increase as income increases

30
Q

What is an Inferior good?

A

An inferior good is a good for which demand decreases as income increases.

31
Q

How does the price of related goods effect the demand curve?

A

Substitute and Compliment goods can make the demand curve shift

32
Q

What is a substitute good?

A

A Substitute good is a good that can be used in the place of another.

33
Q

How does price effect Substitute goods?

A

If the price of substitute good 1 increases, the demand for that good remains the same, while the demand for substitute good 2 increase

34
Q

What is a perfect substitute?

A

A perfect substitute is a good with a constant marginal rate of substitution.

35
Q

What is the MRS of a perfect substitute?

A

There is no diminishing rate of marginal substitution. The ration will always be the same.

36
Q

What is a compliment good?

A

A compliment good is a good that is used in conjuntuion with another. There is usually a ratio where consumption is prefered; i.e 2 cups cereal to 1 cup milk.

37
Q

How does price effect a compliment good?

A

If the price of compliment good 1 increases, the demand for that good stays the same, but the consumption decreases. The demand for compliment good 2 will decrease.

38
Q

What are perfect complements?

A

Perfect compliments are goods that have a 1:1 ratio. i.e. you will always want one left shoe and one right shoe. In the case of perfect compliments the MRS is undefined.

39
Q

How do expected future prices effect the demand curve?

A

If the expected future price of a good rises, current demand for the good increases at the present moment and the demand shifts rightward.

40
Q

How does expected future income and credit effect the demand curve?

A

When expected future income increases or when credit is easy to obtain the demand may increase.

41
Q

How does the population effect the demand curve?

A

The higher the population, the greater the demand for all goods.

42
Q

How do preferences effect the demand curve?

A

The demand for things that people like is always higher.

43
Q

What does the increase of demand do to the demand curve? The decrease of demand?

A

The increase of demand shifts the demand curve rightward while the decrease of demand shifts it leftward.

44
Q

What is the Substitution Effect?

A

The effect of a change in price of a good or service on the quantity bought when the consumer remains on the same indifference curve.

45
Q

What is the Income Effect?

A

The effect of a change in income on buying plans, other things remaining the same. For a normal good, the income effect reinforces the substitution effect.

46
Q

What is the Price Effect?

A

The effect of a change in the price of a good on the quantity of the good consumed, other things remaining the same. _ The sum of the substitution and income effect

47
Q

What is Real Income?

A

Income expressed as a quantity of a good that you can afford to buy

48
Q

What is Opportunity Cost?

A

How much of good X in order to get one more unit of good Y

49
Q

How do we find the Best Affordable Bundle?

A
  1. Define the budget line 2. Identify the bundle that is preferred above the others 2a. Bang per Buck meathod 2b. Best affordable bundle or Highest indifference curve.
50
Q

What is the Budget Line?

A

Shows you how much of a good is obtainable at a certain price

51
Q

What is the equation for the Budget Line?

A

Y= M/Py _ Px/Py M is income, X & Y are goods

52
Q

What does Px/Py tell us in the budget line equation?

A

The opportunity cost of good X

53
Q

What does M/Py tell us in the budget line equation?

A

The real income in terms of good Y

54
Q

Bang Per Buck

A

Equalizing marginal utility per dollar

55
Q

Marginal Utility

A

The change in total utility that results from a one-unit increase in the quantity of a good consumed.

56
Q

What does marginal utility tell us?

A

Marginal Utility is positive _ that is you get more utility _ but it diminishes as the quantity consumed increases

57
Q

What is the equation for Marginal Utility?

A

MUx/Px = MUy/Py MU is marginal Utility

58
Q

What does MUx/Px > MUy/Py tell us and how can we get to a point where MU is equal?

A

If one side has a higher marginal utility per dollar then the other then you want to increase consumption of the high side, while decreasing consumption of the lesser side

59
Q

Where is the Best affordable Bundle or Highest Indifference Curve in terms of MRS and RP?

A

When MRS = Relative Price

60
Q

What is Marginal Rate of Substitution (MRS)?

A

How much of good Y are you willing to give up in order to get another unity of good X _ MRS also shows the slope of the indifference curve. MRS = MUx/MUy

61
Q

What is Relative Price (RP)?

A

The ratio of the price of one good or service to the price of another good or service. RP = Px/Py

62
Q

What is the Demand Curve (DC)?

A

Shows the relationship between quantity demanded of a good and its price; holding everything else constant at a specific point in time. AKA Willingness and Ability to Pay Curve or the Marginal Benefit Curve. (The DC shows price and one good)

63
Q

What is Marginal Benefit?

A

The benefit that a person receives from consuming one more unit of a good or service. It is measured as the maximum amount that a person is willing to pay for one more unit of the good or service. _ The cost of a good or service

64
Q

How do demand and quantity demand relate graphically?

A

A specific point on the DC shows the quantity demanded at a particular price. The DC shows the marginal benefit and the maximum willingness to pay.

65
Q

What is the Maximum Willingness to Pay?

A

The highest amount that you are willing to spend to secure one unit of good X. Economics assumes that even if your net benefit is 0 you will still make the transaction

66
Q

What is Average Benefit?

A

The total benefit divided by the quantity consumed

67
Q

What is Net Benefit?

A

Total Benefit minus the Total Cost

68
Q

What is Consumer Surplus?

A

Excess of benefit received from a good over the amount paid for it. The MB minus its price summed over the quantity bought. Measured by the area under the demand curve and above the price paid up to the quantity bought.

69
Q

What is the Substitution Effect and how is this shown on the graph?

A

The direction of the substitution effect never varies (unambiguous); When the relative price falls, the consumer will always substitute more of that good for other goods. To show this we give Lisa a hypothetical pay cut to put her back on her original indifference curve but with a lower price of movies so her best affordable choice is point K.

70
Q

What is the income effect and how is it shown on the graph?

A

To show the income effect we take away Lisa’s pay cut and return her to the new indifference curve. The move from point K to J illustrates the income effect.

71
Q

What is the price effect and how is it shown on the graph?

A

The price effect is the sum of the substitution effect and the income effect shows by the move from point C to point J.

72
Q

What does point F show? Point H? What do F, I, and H all have in common? Which point is prefered?

A

Point F = Consume more soda and see fewer movies. MRS is greater then the relative price.
Point H = See more movies and consume less soda. MRS is less than the relative price.
Indifferent between F, I and H (On the same indifference curve). And prefer C to I.

MicroEcon Section 2 (5 decks)

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