Untitled Flashcards Set

Sounds good! Here’s a breakdown of all the topics with definitions, key concepts, and formulas:

Price Elasticity of Demand (PED)

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

• Sign: Always negative (law of demand), but we usually take the absolute value.

• Formula:

  PED=%ΔQd%ΔPPED = \frac{\%\Delta Q_d}{\%\Delta P}

  • If ∣PED∣>1|PED| > 1, demand is elastic (responsive to price changes).

  • If ∣PED∣<1|PED| < 1, demand is inelastic (not very responsive to price changes).

  • If ∣PED∣=1|PED| = 1, demand is unit elastic (proportional response).

Elastic vs. Inelastic Demand

• Elastic Demand: Consumers are very responsive to price changes (luxuries, close substitutes).

• Inelastic Demand: Consumers are not very responsive (necessities, no close substitutes).

Determinants of PED

1. Substitutes: More substitutes → more elastic.

2. Necessity vs. Luxury: Necessities → inelastic, Luxuries → elastic.

3. Time Horizon: Longer time to adjust → more elastic.

4. Proportion of Income Spent: Higher proportion → more elastic.

5. Definition of Market: Broad (food) → inelastic, Narrow (specific brands) → elastic.

Elasticity Calculations

1. Calculate PED given % changes:

   PED=%ΔQd%ΔPPED = \frac{\%\Delta Q_d}{\%\Delta P}

2. Calculate % change in Q_d:

   %ΔQd=PED×%ΔP\%\Delta Q_d = PED \times \%\Delta P

3. Calculate % change in P for a given Q_d change:

   %ΔP=%ΔQdPED\%\Delta P = \frac{\%\Delta Q_d}{PED}

Changes in PED Along a Linear Demand Curve

• Upper part: More elastic.

• Midpoint: Unit elastic.

• Lower part: More inelastic.

Revenue and Price Changes

• Elastic demand: Price ↑ → Total Revenue ↓

• Inelastic demand: Price ↑ → Total Revenue ↑

• Unit elastic demand: Price change → No change in Total Revenue.

Income Elasticity of Demand (YED)

• Meaning: Measures how quantity demanded changes with income.

• Sign: Can be positive or negative.

• Formula:

  YED=%ΔQd%ΔYYED = \frac{\%\Delta Q_d}{\%\Delta Y}

  • Normal goods: YED>0YED > 0 (demand ↑ when income ↑).

    • Luxury goods: YED>1YED > 1 (income-elastic).

    • Necessities: 0<YED<10 < YED < 1 (income-inelastic).

  • Inferior goods: YED<0YED < 0 (demand ↓ when income ↑).

Cross-Price Elasticity of Demand (XED)

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

• Formula:

  XED=%ΔQdA%ΔPBXED = \frac{\%\Delta Q_d^A}{\%\Delta P^B}

  • Substitutes: XED>0XED > 0 (price of B ↑ → demand for A ↑).

  • Complements: XED<0XED < 0 (price of B ↑ → demand for A ↓).

  • Stronger relationships → Larger absolute value of XED.

Price Elasticity of Supply (PES)

• Meaning: Measures how quantity supplied responds to price changes.

• Formula:

  PES=%ΔQs%ΔPPES = \frac{\%\Delta Q_s}{\%\Delta P}

• Sign: Always positive (higher price → higher supply).

• Elastic Supply: PES>1PES > 1 (producers respond a lot).

• Inelastic Supply: PES<1PES < 1 (producers respond little).

Determinants of PES

1. Time period: More time → more elastic.

2. Availability of Inputs: More available → more elastic.

3. Flexibility of Production: More flexible → more elastic.

Unit 5: Utility & Consumer Choice

Utility

• Meaning: Satisfaction from consuming goods.

• Measurement: Measured in utils (arbitrary units of happiness).

Total Utility (TU) & Marginal Utility (MU)

• Total Utility (TU): The total satisfaction from consuming a certain quantity.

• Marginal Utility (MU): The additional utility from consuming one more unit.

  MU=ΔTUΔQMU = \frac{\Delta TU}{\Delta Q}

Diminishing Marginal Utility

• As more units are consumed, marginal utility decreases.

• This is the principle of diminishing marginal benefit: Each extra unit is less beneficial.

Budget Line

• Shows possible combinations of two goods a consumer can buy.

• Slope of budget line = Opportunity cost (relative price of goods).

• Equation:

  PAQA+PBQB=IncomeP_A Q_A + P_B Q_B = Income

Opportunity Cost Calculation

• Opportunity cost of Good A:

  PAPB\frac{P_A}{P_B}

  • (How much of Good B you must give up for one unit of Good A).

Bang-for-the-Buck & Utility Maximization

• Marginal utility per dollar:

  MUAPA,MUBPB\frac{MU_A}{P_A}, \quad \frac{MU_B}{P_B}

• Utility-Maximizing Rule:

  MUAPA=MUBPB\frac{MU_A}{P_A} = \frac{MU_B}{P_B}

  • Spend more on the good with higher MU per dollar until equality is reached.

Consumer Equilibrium

• The combination of goods where the consumer maximizes total utility given their budget.

That covers everything! Want to go over some practice problems? 😊