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Price ceiling
the maximum price that a producer is allowed to charge by law, set below equilibrium price, tends to result in shortage, because QS < QD
Price floor
the minimum price that a producer is allowed to charge by law, set above equilibrium price, tends to result in a surplus because QD < QS
Price elasticity of demand
a measure of buyer's responsiveness to a change in price in terms of their percent change in quantity
Budget line
shows all the combinations of 2 goods that the consumer can afford assuming fixed income and prices
Indifference curve
All combinations of two goods that provide equal satisfaction
Change in quantity demanded
movement along the demand curve; caused by a change in price
Change in demand
Will cause the demand curve to shift: 1. Income 2. Population/# of buyers 3. Tastes 4. Prices of compliments and substitutes 5. Expected prices and expected income
Normal goods
if income increases, demand increases and vice-versa
Inferior goods
If income increases, demand decreases, and vice-versa
Things that decrease population
1. Disease 2. National disaster 3. Migration 4. War
Substitute goods
arrows go in the same direction; can be used to replace the purchase of similar goods when prices rise
Complimentary goods
arrow go in different direction; goods that can be used together in consumption
Changes in supply
Causes the supply curve to shift: 1. Technology 2. Price inputs (resources) 3. # of sellers-number of prices to by/sell goods 4. Expected prices (seller's standpoint)
Opportunity Cost
The value of the next best alternative that is given up when making a choice. This is the measure of what you must give up to get what you most want.
Income elasticity of demand
a measure of the responsiveness of demand to changes in consumer income; equal to the percentage change in the quantity demanded divided by the percentage change in income
Cross-demand elasticity of demand
Measures the effect of the change in one good's price on the quantity demanded of the other good. % change demanded of product X / % change in price of product Y
Law of diminishing marginal utility
a law stating that as a person consumes additional units of a good, eventually the utility gained from each additional unit of the good decreases.
Income effect of a price change
Decrease in price of a good increases consumer's real income, making consumers more able to purchase good. Because of this, consumers typically reduce their quantity demanded when price increases
Substitution Effect of a price change
when consumers react to an increase in a good's price by consuming less of that good and more of a substitute good. EX: price of pizza ↑ the quantitiy demand (QD) of pizza ↓ because consumers might switch from pizza to hamburgers
Price elasticity of supply
measures the responsiveness of quantity supplied to a price change; % change in quantity supplied/(divided by) % change in price
ED > 1
elastic; percent change in quantity is greater than percent change in price
ED < 1
inelastic; percent change in price is greater than percent change in quantity
ED = 1
unitary elastic; proportional
Determinants of elasticity
1. number and closeness of substitutes greater number of closely related subs= more elastic demand and vice versa 2. time frame longer time frame= more elastic (you can change your quantity) and vice versa 3. Fraction of income that the price change represents higher fraction of inco…
Assumptions of consumer choice theory
1. Consumers maximize utility 2. More is preferred to less 3. Consumers are knowledgable 4. Transitive preferences 5. Diminishing MRS
Consumers maximize utility
consumers well choose the combination of goods that provide highest level of overall satisfaction
More is preferred to less
consumers prefer the utility curve that is furthest from the origin
Consumers are knowledgable
consumers are able to rank their preferences in order
Transitive preferences
Utility curves can never cross or touch, if they do it suggest indifference between a combo with more utility and a combo with less
Diminishing MRS
the reason IC are coves with respect to the origin; as a consumer sacrifices additional units of good a, they need ever increasing amounts of good b to maintain indifference

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