Micro Test 2
How to calculate Price Elasticity
% change in Q/% change in P
Determinants of Elasticity
-Necessities vs Luxuries -Availability of Substitutes -Expenditure Share (Relative Price to Income) -Time
A measure of the responsiveness of quantity of one good purchased to a change in the price of another good.
Cross-Price Elasticity of Demand
When evaluating Cross-Price Elasticity compare the___________ with 0, not 1.
Ec (elasticity change)
A measure of responsiveness of quantity purchased to a change in income.
Income Elasticity of Demand
Ei= % change in quantity demanded/% change in income
Income Elasticity of Demand formula
Total Revenue: when price goes up quantity demand goes down, when price goes down quantity demand goes up. This is because of the________.
Law of Demand
As more quantity of a good is consumed over a given time period, total utility increases by a decreasing amount, i.e. marginal utility declines.
Law of diminishing marginal utility
The change in total utility obtained by consuming one additional (marginal) unit of a product.MU = ΔTU/ΔQ
Marginal utility
Is the mix of consumer purchases that maximizes the utility attainable from available income.
Optimal consumption
Px Qx + Py Qy = Income
Total expenditure must equal total income
Price x Quantity sold =
Total revenue
The total amount of satisfaction obtained from the consumption of a series of products.
Total utility
The pleasure or satisfaction obtained from using a good or service.
Utility
1) Marginal utility per dollar spent on all goods must equal and 2) Total expenditure must equal total income
Utility Maximization Rule
Cross-Price Elasticity: Suppose candy and popcorn are substitutes for each other in the theater. Lower-priced candy will cause the demand for popcorn to ________.
decrease
For Elastic customers: Increase in price leads to a _________in total revenue. Decrease in price leads to _________in total revenue.
decrease; increase
When a good is a normal good, income elasticity is ___________0. When a good is an inferior good, income elasticity is ________0.
greater than; less than
For Inelastic customers: Increase in price leads to a(an)__________in total revenue. Decrease in price leads to a(an)___________in total revenue.
increase; decrease
Demand for necessities is relatively________ Demand for luxuries are relatively_________
inelastic; elastic
Demand for ____________goods is relatively inelastic. Demand for _____________goods is relatively elastic
low-priced; high-priced
The greater the availability of substitutes, the _______elastic is the product's demand.
more
if Ei > 0, x is a(an) __________ if Ei < 0, x is a(an ___________
normal good; inferior good
If something is inelastic it means that it________
only moves a little bit
If something is unitary elastic it means that it_________
only moves one percent
Diminishing marginal utility: In other words, additional quantities of a good yield __________________increments of satisfaction.
smaller and smaller
Cross-Price Elasticity: if Ec > 0, x and y are ___________ if Ec < 0, x and y are____________ ("Ec" means "Elasticity change")
substitutes; complements
For Cross-Price Elasticity of Demand:
the sign is important
The more _______you have to adjust to the price change, the more elastic your response.
time (bc time allows consumers to seek out available substitutes)
For Unitary Elastic customers: Increase in price leads to a(an)__________in total revenue. Decrease in price leads to a(an)____________in total revenue.
unchanged; unchanged
% change in Q(x)/% change in P(y)
=Cross-Price Elasticity of Demand
Three Elements in a ______________: -Objective: maximize total utility -Constraints: budget constraint -Choices:
Consumer Choice Problem
A measure of the responsiveness of the quantity supplied of a good to a change in the price of that good.
Price Elasticity of Supply
E= % change in quantity supplied/% change in price
Price Elasticity of Supply formula
