Chapter 5 Microeconomics

budget set

consists of all combinations of goods that a buyer can afford

budget contraint

represents all possible combinations of good 1 and 2 that will exhaust the buyers budget

elasticity

measure of how much a variable changes in % terms for a given % change in a variable which determines it

consumer surplus

the difference between willingness to pay and the price of the good; benefit to buyers participating in a market

price elasticity of demand

measures how responsive buyers are, in terms of quantity demanded, to changes in the price

arc elasticity

measures average responsiveness, in quantity demanded, to a price change

elastic demand

a change in product’s price causes a large change in the quantity that people buy

perfectly elastic demand

rise in price results in seller losing all customers

indifference curve

-depict values of utility

-show all possible combinations of good 1 and 2 that provide buyer with same level of utility

utility

measures the satisfaction, happiness, or benefit a consumer receives from consuming a good or service

unit elastic demand

change in price leads to equal and proportionate change in quantity

inelastic demand

Quantity demanded changes by a smaller percentage than the price change.

perfectly inelastic demand

consumers’ buying habits remain unchanged despite price changes

cross-price elasticity of demand

measures how quantity demanded of one good responds to changes in the price of another good

income elasticity of demand

meausures how much the quantity demanded of a good changes when consumer income changes

normal good

as income increases, demand for good increases

inferior good

as income increases, demand for good decreases

income effect

how quantities change due to a change in the purchasing power of a consumer’s income from the price change

substitution effect

how quantities change due to price change, holding all else equal