MT 1 Microeconomics

Price elasticity of demand

Percentage change in quantity demanded of a good resulting from a 1 percent increase in its price.

Elasticity

Percentage change in one variable resulting from a 1 percent increase in another.

Elasticity of demand

how much the quantity demanded changes when price changes.

Elasticity of supply

how much the quantity supplied changes when price changes.

Short run

elasticity is usually lower (more inelastic) because people and firms cannot adjust quickly. (<1%)

Long run

elasticity is usually higher (more elastic) because people and firms have time to adjust production or consumption. (>1%)

Unit elastic

=1

Price Consumption Curve (PCC)

traces the utility-maximizing combinations of two goods as the price of one good changes, while income and the price of the other good remain constant

Arc elasticity formula

It is the percentage change in quantity (based on the average quantity) divided by the percentage change in price (based on the average price).

Independent goods

No effect on Qd of 1 to another

What is a slope of a budget line?

Px/Py price ratio - not a marginal substitution

Consumer surplus

difference between what a consumer is willing to pay for a good and the amount actually paid. CS = ½ ( Pmax - P in equilibrium) * Q in equilibrium

Expenditure will decrease

when elasticity will increase

Expenditure will increase

when prices and demand will increase

Market demand curve

Curve relating the quantity of a good that all consumers in a market will buy to its price. shifts to the right when more consumers enter the market

Elasticity of demand (formula)

Eqd,p=delta Qd/ delta P*P/Qd

Isoelastic demand curve

demand curve with a constant price elasticity

MRS

max amount of goods consumer is willing to give up of one unit in order to obtain another good. MRS=MUx/MUy

Engel curve

curve relating the Q consumed of a good to income

The Income Consumption Curve (ICC)

shows how a consumer’s choice of goods changes when their income changes, while prices stay the same. It shows all the best (optimal) combinations of two goods at different income levels.

More horizontal line

elastic

More vertical line

inelastic elasticity

Infinitely elastic demand

The price decrease, we want to buy max of this product (while the price is low)

Completely inelastic demand

The price increase, but we still buy it.

Income elasticity of demand

Percentage change in the demand resulting from a 1 percent increase in income.

income incr - demand decr = inferior goods

Income decrease - demand decrease = normal goods

Income increase - buying the same or a lil better = necessarily goods

Income increase - buying expensive/branding goods = luxuriously goods )

Cross-price elasticity of demand

Percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another.

Price elasticity of supply

Percentage change in quantity supplied resulting from a 1 percent increase in price. Can be elastic, uni elastic and inelastic

Point elasticity of demand

Price elasticity at a particular point on the demand curve.

Elasticity sign

Price with elasticity demand should be negative (slope)

Short run (production)

Period of time in which quantities of one or more production factors cannot be changed.

Fixed input

Production factor that cannot be varied.

Long run (production)

Amount of time needed to make all production inputs variable.

Income elasticity (time difference)

For most goods and services the income elasticity of demand is larger in the long run than in the short run.

Durable goods elasticity

The short run income elasticity of demand will be much larger than the long (cars, appliances)

Marginalism

is a theory in economics that explains the value (price) of goods and services based on their marginal utility.

Marginal utility importance

Marginal utility matters more than total.

Marginal utility

the additional satisfaction or benefit a consumer gains from consuming one extra unit of a good or service (goes down). Can be neg.

Consumer behavior steps

1. Consumer preferences 2. Budget constraints 3. Consumer choices

Indifference curve (indifference map)

curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction. They cannot intersect, can have a budget line.

Indifference map

graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent.

Shape of indifference curve

The indifference curve is always convex - going down. Or concave - mirror shape

Slope of indifference curve

MRS

Perfect complements

Two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles.

Utility

Numerical score representing the satisfaction that a consumer gets from a given market basket.

Utility function (market baskets)

Formula that assigns a level of utility to individual
U(F,C)=F*C

Ordinal utility function

Utility function that generates a ranking of market baskets in order of most to least preferred.

Cardinal utility function

Utility function describing how much one market basket is preferred to another.

Budget constraints

Constraints that consumers face as a result of limited incomes.

Budget line

All combinations of goods for which the total amount of money spent is equal to income. Slope = Px/py (MRS). Px, Py both decrease in the same % or amount - slope wont change but will move right

Marginal benefit

Benefit from the consumption of one additional unit of a good.

Marginal cost

Cost of one additional unit of a good.

Diminishing marginal utility

Principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility.

Consumer equilibrium

MUx/Px=MUy/Py ; MUx/MUy=Px/Py ; MRS=Px/Py