Units 1-2 Flashcards
Explicit costs
Monetary prices
Implicit costs
Non-monetary / implied prices
Marginal cost/benefit
Additional cost/benefit for one more unit
Go until cost > benefit
Utility
Measure of satisfaction
Units are “utils”
Total cost/benefit
Sum of cost/benefit to that point
Go for maximum difference
Marginal utility
Δtotal utility / Δquantity
Maximize total utility
Until marginal utility = 0
Maximize total utility per dollar
Until MU = price
Maximize total utility per dollar for multiple products (limited budget)
MU/P = MU/P for multiple products
Price elasticity of demand
Δ%Qd / Δ%price
Where a demand curve is more elastic
Higher price, lower quantity
Where a demand curve is more inelastic
Lower price, higher quantity
Price-elastic demand/supply
Ed > 1 / Es > 1
Line appears flatter
For luxuries (demand)
Price-inelastic demand / supply
Ed < 1 / Es < 1
Steeper slope
For necessities (demand)
Unit elastic demand / supply
Ed = 1
Slope is -1 (demand) or 1 (supply)
Availability of close substitutes causes ______
Elastic demand
Larger % of budget causes _____
Elastic demand
More time causes _____
Elastic demand
Elastic supply
Total revenue test
Price * quantity
Elastic if P & R shift different ways
Inelastic if P & R shift same way
Price elasticity of supply
Δ%Qs / Δ%P
Increasing price of alternative inputs causes _____
Inelastic supply
Income elasticity of demand
Δ%Qd / Δ%Income
Normal good
Positive income elasticity of demand
Inferior good
Negative income elasticity of demand
Cross-price elasticity of demand
(Δ%Qd for good X) / (Δ%Price for good Y)
Substitute goods
Positive cross-price elasticity of demand
Complementary goods
Negative cross-price elasticity of demand
Unrelated goods
Zero cross-price elasticity of demand
