Upgrade to remove ads
Econ - Chapter 5
Terms in this set (46)
something that motivates or encourages one to do something
1. Why do they like it
2. How much does it cost
3. How much money do you have
Why do they like it?
1. want the biggest bang for their buck
2. what we buy reflects our tastes
How much does it cost?
1. Prices are fixed - no negotiation
2. we can buy as much as we want of something without driving up the price
How much money do you have?
1. There is no saving or borrowing, only spending
2. even though we use a straight line to represent purchase choices, we only purchase whole units
Why is budget constraint downward sloping?
Trading off one good for another; represents opportunity cost
different combos we can buy and afford
Best alternative use of a resource
Loss of item
Gain of item
shows the bundles of goods or services that a consumer can choose given a limited budget
economic agents has to give up one to get something else
As you buy more of a good...
marginal benefit of buying another one decreases
benefit of buying next item - benefit of buying last item
Marginal benefit divided by cost...
marginal benefit per dollar spent
The higher marginal benefit per dollar spent...
is the item you buy first
Consumer Equilibrium Condition
------ + ------
An increase in income...
A decrease in income....
the budget constraint will shift out
the budget constraint will shift in
Demand curve comes from...
quantity purchased at given price (marginal benefit/cost)
Why is a decrease in price necessary for another purchase?
because of the decrease in benefit per purchase of another
difference between what you are willing to pay and what you have to pay (the market price)
CS = 1/2 B* H
As market price goes up, what happens to consumer surplus?
goes down, the triangle gets smaller because the height gets smaller
As price increases, what happens to consumers?
they are made worse off; dont value it as much and if they do buy it they get less consumer surplus
measure of how sensitive one variable is to change of another
Price Elasticity of Demand (PED)
measures the percentage change in quantity demand of a good due to percentage change in its price
method of calculating elasticity that measures at the mid point of demand range
Arc Elasticity Formula
Elasticity changes as you....
go down the demand curve; greater than 1 at the top, 1 in the middle, less than 1 at the bottom
Ed > 1
Elastic; percent change in Q is BIGGER than percent change in price
Ed < 1
Inelastic: percent change in Q is LESS than percent change in price
Ed = 1
Unit Elastic; percent change in Q is EQUAL to percent change in price
Ed = infinity
Perfectly Elastic; people stop buying goods if the price changes at all
line is horizontal
Ed = 0
Perfectly Inelastic; no matter change in price they have to buy the good
Line is vertical
Total Revenue Test: Demand is INELASTIC
price and total revenue go the same way
Total Revenue Test: Demand is ELASTIC
price and total revenue more in opposite directions
Determinants of Price Elasticity
1. number and closeness of substitutes
2. budget share spent on the food
3. time horizon available to adjust to change
- few substitutes
- small part of budget
- short run (less time)
* more responsive
- more substitutes
- large part of budget
- long run (more time)
Cross-Price Elasticity of Demand
the percent change in quantity demanded of a good over the percent change in another good price
Cross-Price Elasticity Formula
/_\Q in good X
/_\ Q in good Y
*(-) sign and magnitude matter
Ed > 0 (cross-price)
X and Y are substitutes
Ed < 0 (cross-price)
X and Y are compliments
Ed is close to 0... (cross-price)
the less of a relationship between the two
Income Elasticity of Demand
percent change in quantity demand over percent change in income
Income Elasticity of Demand Formula
Ed > 0 (IED)
income goes up, Q of normal good goes up
Ed < 0 (IED)
income goes down, Q of inferior good goes up
This set is often in folders with...
Econ - Chapter 1
Econ - Chapter 2
Econ - Chapter 4
Econ - Chapter 6
You might also like...
EC 301 Exam One Terms and Equations
McCaleb Test 2 Eco2023
Exam 1 Review: Chapter 2 & 3
Other sets by this creator
IR - Quiz 4
Econ - Midterm 3
IR - Quiz 3
Econ - 2nd Midterm
Other Quizlet sets
SAS 6th - Lit: Entertainment 19th&20th Century
Social Studies Test
GHC HS 101 Roles Cont.
Test #3 Spinal Mechanics