Micro Unit 1 Test

Shifts in Demand

1. Consumer preferences

2. Number of coneumers

3. Consumer income

4. Price of related goods

5. Consumer expectations

Shifts in Supply

1. Input Costs

2. Technology

3. Taxes/Subsidies

4. Price expectations

5. Number of Sellers

Price Elasticity

The responsiveness or sensitivity of consumers or producers to a change in price.

If there is high responsiveness to change then….

the product is very elastic

\

if there is no responsiveness….

then the product is inelastic

Elastic

Price impacts quantity demand greatly; Total Revenue increases, Prices decrease and vice versa

Inelastic

Price minimally affects quantity demanded; Total revenue increases, Prices increase and vice versa

Perfectly inelastic

When price does not change a consumer’s response (very rare). ED will be equal to zero.

Perfectly elastic

When the smallest change in price completely affects consumers

Determinants of Price Elasticity of Demand

Substitutability, Proportion of Income, Luxuries vs. Necessities, Time

Substitutability

The more substitutes, the higher elasticity

Luxuries vs Necessities

The more luxury of a good, the more elastic it is

Time

Demand is more elastic over time

Elasticity Formula

% Change in Q / % Change in P

If the number is greater than 1 it is…

Elastic

If the number is less than 1 it is…

Inelastic

If the number is 0 it is…

Perfectly inelastic

If the number is infinity it is…

Perfectly elastic

Total Revenue

The total amount the seller receives from the sale of a product in a particular time period. Using this we can find the elasticity of quantity demanded

Total Revenue Formula

Price x Quantity

Explicit Opportunity Costs

Ones that require you to spend money

Implicit Opportunity Costs

Ones that people/businesses need to give in order to use a resource

Total benefits

The amount of satisfaction people receive from the goods and services they use.

Total costs

The time, effort required to obtain the goods and services

Total net benefits

Are the difference between total benefits and costs

Marginal Benefit Formula

Change in total benefits / Change in output

Marginal Cost formula

Change in total cost / Change in output

Benefit Maximizing rule formula

MB > MC Increase output

MB = MC Optimal level of output

MB < MC Reduce output

Consumer choice theory

1. Consumers are rational

2. Consumers are never 100% satisfied

3. Consumer satisfaction decreases with each unit of consumption (diminishing marginal utility)

Marginal utility

refers to the additional amount of usefulness that someone gets from one extra unit of good/service

Total Benefit =

Marginal Benefit

Total Cost

Marginal cost

When optimal quantity exists, it is when

MB = MC

Sunk Costs

Past spendings on that good or service

Utility Maximization Formula

MU of product A / price of A = MU of product B / Price of product B

Cross elasticity of Demand Formula

Percentage change in quantity demanded of product / percentage change in price of product Y

Cross elasticity of demand deals with…

substitutes and complementary goods

If cross elasticity value is positive, then…

X and Y are substitute goods

If cross elasticity value is negative, then…

X and Y are complementary goods

Independent goods

not affected by cross elasticity

Income Elasticity of Demand Formula

Percentage change in quantity demanded / percentage change in income