WEEK 3 Flashcards
What is the cross-price elasticity of demand
The %change in quantity demanded of a good in response to a 1% in price of another good
Example of cross-price elasticity
If coffees demand increases by 1%, tea demands are increased by 2%
In cross-price elasticity when is the effect positive and negative
Positive if a substitute
Negative if complements
What is income elasticity of demand
%change in demand associated with a 1% change in consumer income
what does income elasticity of demand show
shows how responsive demand is to income changes
IS income elasticity positive or negative for normal and inferior goods
Positive for normal goods
Negative for inferiror goods
What does the price elasticity of supply measure
Sellers sensitivity to changes in price
What is the equation for elasticity of supply
%change in quantity supplied / %change in price
Determinents of supply elasticity
Flexibility of inputs
Mobility of inputs
Ability to produce substitute inputs
Time
What is consumer surplus
The difference with a buyers reservation price and how much they pay
How to work out consumer surplus
Find the area below the demand line above the equilibrium price
What is producer surplus
The difference with sellers reservation price and price received
How to work out producer surplus
The area above the supply line until the equilibrium price
How to find the total economic surplus
Consumer surplus + Producer surplus
What is Pareto efficiency
No one can be made better off without making someone worse off
When is the market Pareto efficient
When market equilibrium is found
What is competitive equilibrium
When profit and utility maximizing consumers/producers meet at an efficient price
What assumptions are made for a market to be Pareto efficient
All benefits from consumption are captured by demand curve
All costs from production are shown in supply curve
Low transaction cost
Perfectly competitive market
How to find DWL
After finding the producer and consumer surplus the remaining area in the triangle up until the equilibrium is the DWL
What is DWL
Dead weight loss is the reduction in total economic surplus
What is the other goal than efficiency for markets
Equity
What are consumer and producer curves
Consumer - demand
producer - supply
What are the 3 steps to pick the best consumer bundle
Preferences
Budget constraints
Put them together
What is a consumption basket
A complete list of quantities for all available goods
What is the notation for consumption baskets
(Xa,Xb,Xc)
If something is strictly preferred then what sign
greater than
If something is weakly preferred what is the sign
greater than or equal to
If something is indifferent what is the sign
Swiggly line, can pick either one
What assumptions are made in consumption baskets
Completeness
Transitivity
Non-satiation
What is completeness
For any bundle they can choose what item they prefer
What is transitivity
If A>B and B>C then assume A>C
What is non - satiation
More is better than less
What notations the utility function
U(X)
What is utility function
Assign to each bundle a number of happiness
If U(X) > U(Y)
Strictly prefers X
If U(X) = U(Y)
Indifferent
What does ordinal utility mean
Ranking matters between bundles, not the difference
When are indifference curves used
When 2 bundles are indifferent
Give 2 co ords on an indifference curve
(3,4) and (4,3) - 3x4=4x3
Where are higher utility curves
Further away from the origin
Always what sloping
Downwards sloping
Can they cross
NO
If 2 bundles are on the same curve they are
indifferent
