Untitled Flashcards Set

Price Elasticity of Demand (PED)

Measures how much quantity demanded responds to a change in price.

PED formula

PED = %ΔQd / %ΔP

Elastic Demand

Consumers are very responsive to price changes.

Inelastic Demand

Consumers are not very responsive to price changes.

Determinants of PED

Factors that affect price elasticity of demand including substitutes, necessity vs. luxury, time horizon, proportion of income spent, and definition of market.

Normal goods

Goods with YED > 0; demand increases when income increases.

Inferior goods

Goods with YED < 0; demand decreases when income increases.

Cross-Price Elasticity of Demand (XED)

Measures how demand for one good changes when the price of another good changes.

Substitutes

Goods for which XED > 0; demand for one increases when the price of the other increases.

Complements

Goods for which XED < 0; demand for one decreases when the price of the other increases.

Price Elasticity of Supply (PES)

Measures how quantity supplied responds to price changes.

Elastic Supply

PES > 1; producers respond significantly to price changes.

Inelastic Supply

PES < 1; producers respond little to price changes.

Total Utility (TU)

The total satisfaction from consuming a certain quantity of goods.

Marginal Utility (MU)

The additional utility from consuming one more unit.

Diminishing Marginal Utility

As more units are consumed, marginal utility decreases.

Budget Line

Shows possible combinations of two goods a consumer can buy based on their income.

Opportunity Cost of Good A

The amount of Good B that must be given up to obtain one unit of Good A.

Utility-Maximizing Rule

Consumers maximize utility when MU of goods per dollar spent is equal.

Consumer Equilibrium

The combination of goods where total utility is maximized under a given budget.