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ECON 1123: EXAM 1
Price ceiling
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the maximum price that a producer is allowed to charge by law, set below equilibrium price, tends to result in shortage, because QS < QD
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Price floor
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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
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Price elasticity of demand
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a measure of buyer's responsiveness to a change in price in terms of their percent change in quantity
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Budget line
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shows all the combinations of 2 goods that the consumer can afford assuming fixed income and prices
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Indifference curve
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All combinations of two goods that provide equal satisfaction
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Change in quantity demanded
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movement along the demand curve; caused by a change in price
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Change in demand
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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
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Normal goods
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if income increases, demand increases and vice-versa
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Inferior goods
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If income increases, demand decreases, and vice-versa
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Things that decrease population
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1. Disease
2. National disaster
3. Migration
4. War
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Substitute goods
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arrows go in the same direction; can be used to replace the purchase of similar goods when prices rise
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Complimentary goods
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arrow go in different direction; goods that can be used together in consumption
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Changes in supply
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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)
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Opportunity Cost
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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.
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Income elasticity of demand
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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
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Cross-demand elasticity of demand
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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
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Law of diminishing marginal utility
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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.
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Income effect of a price change
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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
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Substitution Effect of a price change
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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
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Price elasticity of supply
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measures the responsiveness of quantity supplied to a price change; % change in quantity supplied/(divided by) % change in price
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ED > 1
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elastic; percent change in quantity is greater than percent change in price
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ED < 1
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inelastic; percent change in price is greater than percent change in quantity
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ED = 1
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unitary elastic; proportional
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Determinants of elasticity
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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 income= more elastic and vice versa
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Assumptions of consumer choice theory
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1. Consumers maximize utility
2. More is preferred to less
3. Consumers are knowledgable
4. Transitive preferences
5. Diminishing MRS
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Consumers maximize utility
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consumers well choose the combination of goods that provide highest level of overall satisfaction
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More is preferred to less
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consumers prefer the utility curve that is furthest from the origin
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Consumers are knowledgable
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consumers are able to rank their preferences in order
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Transitive preferences
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Utility curves can never cross or touch, if they do it suggest indifference between a combo with more utility and a combo with less
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Diminishing MRS
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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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