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ECON 201: Exam 2
cross price elasticity of demand
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responsiveness of quantity demanded of one good to changes in the price of another good
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Rival means
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One persons consuming the good means no one else can consume it. Ex) if I eat a hamburger, no one else can. Same with 2 people wearing the same pair of shoes. Doesn't work.
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Excludable means
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If you do not pay for the good, you cannot consume it. Ex) hamburger: if you don't pay, McDonald's won't sell it to you
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Privates goods are
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Excludable and rival
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Quasi-public goods are
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Non rival and excludable
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Common resources are
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Rival and non-excludable
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Public goods are
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Non rival and non excludable
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Examples of private goods
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Food
Clothing
Cars
Tv
Mail
Private school
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Examples of quasi-public goods
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Cable tv
Sirius xm
Satellite radio
Netflix
Hiking (with fence)
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Examples of common resources
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Roads
Internet
Fish in the ocean
Education in public school
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Examples of public goods
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Clean water/air
National defense
Hiking (no defense)
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Public good that is non-rival and non-excludable
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Fireworks
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What is the problem with private provision of public goods?
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Free riding which leads to market failure
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Free riding definition
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Everyone benefits but they don't have to pay for it
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Common resources leads to the problem of
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Tragedy of the commons
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Tragedy of the commons definition
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The tendency of a common resource to be overused
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What causes tragedy of the commons?
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Private incentive and social incentives do not line up
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cross price elasticity formula
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% change in quantity demanded of A/ %change in the price of B
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if the products are substitutes, the cross price elasticity of demand will be
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positive
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if the products are complements, the cross price elasticity of demand will be
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negative
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if the products are unrelated, the cross price elasticity of demand will be
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zero
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income elasticity of demand
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responsiveness of quantity demanded to changes in income
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income elasticity of demand formula
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% Δ in QD / % Δ in income
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If the income elasticity is positive but less than 1 the good is..
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Normal and a necessity
- Bread
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examples of a normal necessity:
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-milk, bread, eggs
-JC Penny's, GAP, Toyota Corolla, Ford Focus
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if the income elasticity of demand is positive but greater than one the good is
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normal and a luxury
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examples of normal luxuries
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-crab legs, steak
-gucci, banana republic
-audi, porsch
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if the income elasticity of demand is negative then it is
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inferior
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examples of inferior goods
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-fast food, spam
-walmart, old navy
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price elasticity of supply definition
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responsiveness of the quantity supplied to a change in price
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price elasticity of supply formula
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% change in qty supplied
____________
% change in price
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because the supply is upward sloping, the price elasticity of supply will be
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positive
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if the price elasticity of supply is less than one, then supply is
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inelastic
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if price elasticity of supply is greater than one, then supply is
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elastic
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if the price elasticity of supply is equal to 1, then supply is
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unit elastic
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what is the primary factor that will effect price elasticity of supply?
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passage of time
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total costs
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the total cost of all the inputs a firm uses in production
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variables costs and examples
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costs that change depending on how much output there is
(ingredients, drinks, labor)
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fixed costs and examples
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costs that remain constant, regardless of output
(rent, insurance)
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how do you calculate total cost
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TC=VC+FC
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short-run definition
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time period during which at least one input is fixed
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long-run definition
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the period of time during which a firm can vary all its inputs
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difference between the short-term and the long-run
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in the long run, all the costs are variable, in the short run, at least one cost is fixed
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explicit costs definition/examples
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cost that involves spending money (capital equipment, oven materials, ingredients, labor, rent, utilities, advertising, taxes)
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implicit costs definition/examples
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-income i could have earned at my next best job (lost interest or stock dividends)
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profits are defined as
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profits=total revenue-total cost
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elasticity means
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measure of how much one economic variable changes to changes in another economic variable
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Why do we use elasticity and not slope?
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slope is sensitve to the units
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price elasticity of demand is
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the responsiveness of the quantity demanded to a change in price
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price elasticity of demand formula
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% change in Q / % change in Price
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How do you calculate the percentage change in price?
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% Δ p2- % Δp1/(p2+p1)/2
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is the price elasticity of demand is not the same as the slope of the demand curve?
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NO
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the larger the elasticity, the more ______ i am to price changes
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sensitive
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inelastic demand:
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when percentage change in quantity demanded is less than the percentage change in price
-absolute value is elasticity is less than 1
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examples of inelastic demand
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gasoline, addictive goods (cigarettes), utilities, medicine
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elastic demand:
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when the percentage change in quantity demanded is greater than the percentage in price
-absolute value is greater than 1
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examples of elastic demand
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raman noodles, pepsi, vacations
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unit elastic demand:
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when the percent change in quantity demanded is equal to the percent change in price
-absolute value of price elasticity is equal to 1
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perfectly elastic demands are:
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horizontal, (undefined, ∞)
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perfectly inelastic demand:
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vertical, (0)
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determinants of elasticity of demand:
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1. availability of close substitutes
2. passage of time
3. luxuries versus necessities
4. definition of the market
5. share of a good in a consumer's budget
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utility is
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the enjoyment people receive from consuming goods pr services
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utility measure ordinal:
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give rankings of what you like, but the actual values are meaningless
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marginal utility
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the change in total utility a person receives from consuming an additional unit of a good or service
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why is marginal utility more important than total utility in consumer decision making?
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because optimal decisions are made at the margin
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law of diminishing marginal utility
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the more you consume of a good or service, the less utility each additional unit gives you
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what does the law of diminishing marginal utility suggest?
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that consumers experience diminishing additional satisfaction as they consume more of a good or service
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the rule of equal marginal utility per dollar spent
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spending should be allocated across goods so that the marginal utility per dollar spent is the same for each good
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formula for utility per dollar spent:
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MU1/P1=MU2/P2
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the market for chevron gas price elasticity of demand is more elastic if
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had more close substitutes
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when referring to utility, budget constraint must be:
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binding- means total spending must be equal to total amount available to spend
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