Microeconomics Unit 2

Law of Demand

if price goes up, quantity demanded goes down and vice versa

Substitution effect

if price goes up for a product, consumers buy less of that and more of another product

Income effect

if price goes down, consumer’s purchasing power increases so they buy more

Market demand

sum of all individual quantities demanded

Substitutes

goods can replace each other price. price of one increases, demand for other increases

Complements

goods are bought and used together. price of one increases, demand for other decreases

Normal goods

income increases, so does demand

Inferior goods

income increases, demand decreases

Law of supply

direct relationship between price and quantity supplied (positive slope)

Consumer surplus

difference between what you are willing to pay (buyer max - price) and actually pay OR difference between total benefit and cost

Producer surplus

difference between price seller received (price - seller min) and how much they will sell for

Total surplus

consumer + producer surplus

Total producer/consumer surplus

area of the whole triangle

PES

% change in Q/% change in P

Inelastic < 1 < elastic

PED

|% change in Q/% change in P| (inside always negative)

Inelastic < 1 < elastic

XED

% change in Q of product A/$ change in P of product B

Positive: substitute, Negative: complement

YED

% change in Q/% change in Income

Positive: normal good, Negative: inferior good

% change in P

(New P - Old P)/Old P *100

Total Revenue test

Price * Quantity

Inelastic: price and TR are direct, Elastic: Price and TR are inverse