Section 3: Supply and demand Flashcards
Name the 4 key assumptions of neoclassical economics for demand
- Individuals act to maximize utility
- People are rational (have preferences and different products)
- Perfect information
- All costs and benefits are represented (no externalities)
Name the 3 key assumptions of neoclassical economics for supply
- Firms act to maximize profit
- Perfect competition among sellers
- No transaction costs
Define utility and explain how it is measured
Utility is human satisfaction or well-being
Measured as willingness-to-pay
What does “Ceteris Paribus” mean?
All else held constant
Define opportunity cost
The value of the best alternative not chosen
What are some critiques of WTP as a measure of value?
- Depends on income/wealth
- Challenges of monetization
- Preferences can change
What is the law of demand?
As price falls, the quantity demanded rises
The market demand curve is the ____ sum of individual demand curves
Horizontal
What could cause a demand curve to shift?
Changes in:
- Number of buyers
- Preferences/tastes
- Income
- Price of other goods (substitutes)
- Consumer expectations
How do you calculate own-price elasticity?
Elasticity = (percent change in quantity) / (percent change in price)
A product has an own-price elasticity of -0.40. Is it elastic or inelastic?
Inelastic
A product has an own-price elasticity of -1.25. Is it elastic or inelastic?
Elastic
What is cross-price elasticity?
Percent change in quantity demanded for good A as the price of good B changes by a percent
What is income elasticity?
Percent change in demand for a good as consumer income increases by one percent
For complements, is the cross-price elasticity positive or negative?
Negative
