Unit 2 Flashcards
What is the law of demand?
Inverse relationship between price and quantity demanded (P↑QD↓, P↓QD↑)
Why are demand curves downward sloping?
- The subtitution effect
- The income effect
- The law of diminshing marginal utility
What are the five shifters of demand?
- Tastes and preferences
- # of consumers
- price of related goods (substitites and complements)
- Income
- Future Expectations
What is a normal good?
Experiences an increase in demand as income increases
Think of luxury goods
What is an inferior good?
Experiences a decrease in demand as income increases
What is the law of supply?
Direct relationship between price and quantity supplied (P↑QS↑P↓QS↓)
Why is the market supply curve upward sloping?
As the price of a product rises, businesses are more willing to produce it.
Direct relationship
What are the five shifters of supply?
- Prices/Availability of inputs (resources)
- # of Sellers
- Technology
- Gov Action (Taxes and Subsidies)
- Expectations of Future Profit
Technology is typically a right shifter
What is the general price elasticity equation?
%Δ in quantity/%Δ in price
What is inelastic demand?
Quantity is insensitive to a change in price
(P↑QD↓ a little
P↓QD↑ a little)
People will continue to buy it
General charateristics of inelastic demand?
- Few substitutes
- Necessities
- Small portion of income
- Required now, rather than later
5. Elasticity coefficient less than 1
What is elastic demand?
Quantity is sensitive to a change in price
(P↑QD↓ a lot
P↓QD↑ a lot)
The amount people buy is sensitive to price
General characteristics of elastic demand?
- Many substitutes
- Luxuries
- Large portion of income
- Plenty of time to decide
5. Elasticity coeffecient greater than 1
Coefficient for perfectly inelastic demand?
0
Coefficient for inelastic demand?
<1
Coefficient for unit elastic demand?
1
Coefficient for elastic demand?
greater than 1
Coefficient for perfectly elastic demand?
∞
What is cross-price elasticity of demand (XED)?
Shows how sensitive a product is to a change in price of another good
Negative: Complements
Positive: Substitutes
What is the income elasticity of demand (YED)?
Shows how sensitive a product is to a change in income
Positive: Normal
Negative: Inferior
What is a price ceiling?
Maximum legal price a seller can charge for a product
- below equilibrium, shortage
What is a price floor?
Minimum legal price a seller can sell a product.
- above equilibrium, surplus
What is a subsidy?
Government payment to a business/market
(+ right shift, good)
How to calculate %Δ?
[(New-old)/old] x 100
