week 2 Flashcards
what are comparative statics
the comparison of two different economic outcomes before and after a change in some underlying exogenous parameter
what is a change in quantity demanded
refers to a movement along a given demand curve
what is a change in demand
refers to an entirely new demand curve
what factors shift demand
change in price of related goods
change in income
change in preferences
change in population
change in expectation of future prices
what are complementary goods
goods that are consumed together
if the price of a complementary good decreases then demand increases
what are substitute goods
goods that are consumed in place of one another
if the price of a substitute good increases, then demand increases
what is a normal good
an increase in income leads to an increase in demand
what is an inferior good
an increase in income leads to a decrease in demand
how do changes in preferences shift demand
when it became clear that smoking had severe negative health consequences, lead to a decrease in demand
how do changes in population shift demand
more buyers lead to increase in demand
how do changes in expectation of future prices shift demand
if prices will increase soon, may purchase a good now
how does increase in demand shift the curve
an increase in demand leads to an increase in equilibrium price and quantity
how does decrease in demand shift the curve
a decrease in demand leads to a decrease in equilibrium price and quantity
how does decrease in demand shift the curve
a decrease in demand leads to a decrease in equilibrium price and quantity
what factors shift supply
weather
change in expectations
change in number of sellers
how does decrease in supply effect the supply curve
a decrease in supply will lead to an increase in equilibrium price and a decrease in equilibrium quantity
how does increase in supply effect the supply curve
an increase in supply will lead to a decrease in equilibrium price and an increase in equilibrium quantity
what is price elasticity of demand
denoted by ε
measure of responsiveness of quantity demanded to changes in price
how do you calculate ε
percentage change in quantity demanded / percentage change in price
ΔQ / ΔP x P/Q
what do the results of ε mean
ε > 1 - demand is elastic and consumers are fairly responsive to price change
ε < 1 - demand is inelastic and consumers are fairly unresponsive to price change
ε = 1 - demand is unit elastic
what is perfectly elastic demand
even the slightest price increase leads consumers to switch to substitutes
what is perfectly inelastic demand
consumers cannot switch to substitutes or stop buying when price increases
what is perfectly inelastic demand
consumers cannot switch to substitutes or stop buying when price increases
what are the determinants of ε
availability of close substitutes
what is arc elasticity
price elasticity of demand between two points on the demand curve
what is price point elasticity
a measure of the elasticity of demand at a particular point on the demand curve
what is ε at point A on the demand curve
εA = ΔQ/ΔP x P/Q = 1/slope x P/Q
how do you compare price elasticity for two demand curves that intercept
if price and quantity are the same, price elasticity is always greater for the less steep of the two demand curves
how is revenue effected if demand is elastic
a small increase in price will decrease quantity demanded by a relatively large amount
how is revenue affected if demand is inelastic
a large increase in price will decrease quantity demanded by a relatively small amount
an increase in price increases total revenue
