Week 3 Flashcards
what is utility?
represents the satisfaction that an individual derives from consuming a good.
what is utility measured in?
time
what happens to price as utility goes up?
price also goes up
what is decreasing marginal utility?
when consumers get an extra unit of a good the utility decreases.
what is the cost benefit principle?
states that action must be taken if the marginal benefit is greater than the marginal cost.
what is the law of demand?
customer demands more of a good when the price decreases
what is the substitution effect?
captures the change in demand following the change in relative price.
what happens to the substitution effect demand when price increases?
substitution effect demand would decreases
what is the income effect?
captures the change in demand following the change in the customers purchasing power.
what are the 2 types of good that are affected by income effect?
normal good
inferior good
what happens to normal good’s demand when price increases
their demand also increases
what happens to normal good’s demand when income increases?
the demand increases
what happens to inferior good’s demand when income increases?
demand decreases (cuase it is a low quality), cheeper ersion
what directions does the demand curve slop?
downwards
what are substitute good?
are products that can replace each other because they serve the same purpose
what are complements good?
are products that are used together
what cause the demand curve to shift to the right?
-marketing
decrease in price of complements
-increase price of substitutes
- increase income for normal good
-decrease income for inferior goods
-population growth
postive shift in customer preference
what is the law of demand?
demand curves has a tendency of downwards sloping
what is the correlation between demand and price?
they are inversely related
how to calculate elasticity?
(2 formulas)
-(△Q/Qa)/(△P/Pa): Qa- the orginal value of Q
-1/solpe X (pa/Qa)
calculate the elasticity
for the price it dropped from 4 to 3 so the percentage change would be 1/4 (1 for 4-3 and /4 s it was the orginal), then the percentage is 25%
as for the quantity the change was from 20 to 22, so the percentage change would be 2/20=1/10 (as 22-20=2 and the original is 20) so the percentage would be 10%
25%/10%=0.4
but know we can see that when the price decreases the quantity increases which then causes the symbol to be negative.
SO the ANSWER is -0.4
what does the negative sign mean in elasticity?
it tells us that the curve is sloping downwards, it tells us that the price decrease the quantity increases.
what happens to the elasticity when the no. is greater than 1
elastic
what happens to the elasticity when the no. is less than 1
inelastic
what is elasticity?
measures how much one economic variable (like demand or supply) responds to a change in another variable
what happens to a place where there are more substitute available (more competition)?
the elasticity would be higher, as there r more other options readily available.
what’s the difference between these 2 formulas?
-(△Q/Qa)/(△P/Pa): Qa- the original value of Q
-1/slope X (pa/Qa)
one find the elasticity at a certain point while the other finds the elasticity between 2 points
how to calculate the revenue on a demand curve?
its the area underneath the curve
what happens to revenue when it is inelastic when price goes up?
revenue goes up
what happens to revenue when it is elastic when price goes up?
revenue will go down
