AP Microeconomics (section 9)

Veblen good

"SNOB VALUE"- straight line at minimum quantity point c-shaped curve/ u-shaped curve facing away from the positive y-axis

Factors that determine the Price elasticity of Demand

SPLAT many vs little Substitutes, large vs small Proportion of income/budget, Luxury vs necessity, Addictive, a lot vs a little Time

Total surplus

The sum of consumer and producer surplus Consumer surplus and producer surplus' borders meet at equilibrium price and quantity (demand and supply curves meet)

optimal consumption rule

in order to maximize utility, a consumer must equate the marginal utility per dollar spent on each good and service MUc/Pc=MUc/Pc

budget constraint

limits the cost of a consumer's consumption bundle to no more than the consumer's income.

Perfectly inelastic

quantity demanded does not respond at all to the changes in price (PRICE CHANGES QUANTITY DOES NOT) VERTICAL LINE

Price elasticity of demand

ratio (% change in quantity/% change in price) as we move along the demand curve. (NEVER NEGATIVE) % change in quantity= change in quantity/initial quantity before change % change in price= change in price/initial price before change OR MIDPOINT METHOD

Consumer surplus

refers to both individual and total consumer surplus (Top area of triangle on graph) Fall in price increases consumer surplus Rise in price decreases consumer surplus REALLOCATING CONSUMPTION LOWERS CONSUMER SURPLUS

Producer surplus

refers to both individual and total producer surplus (bottom area of triangle on graph) Rise in price increases producer surplus Decrease in price decreases producer surplus (positive correlation) REALLOCATING SALES LOWERS PRODUCER SURPLUS

Regressive tax

rises less than in proportion to income (unfair to the low-income tax payers)

Progressive tax

rises more than in proportion to income (unfair to the high-income tax payers)

Perfectly elastic

sensitive to price change Any price increase will cause the quantity demanded to drop to zero HORIZONTAL LINE

Income elasticity of demand

shows how sensitive a product is to a CHANGE IN INCOME =(% change in quantity)/(% change in income) NEGATIVE= inferior good POSITIVE= normal good 0=N.R.

Cross price elasticity

shows how sensitive a product is to a change in price of ANOTHER good =(% change in quantity of good A demanded)/(% change in price of good B) NEGATIVE= complements POSITIVE= substitutes 0=N.R.

marginal utility curve

shows relationship between marginal utility and how it depends on the quantity of a good or service consumed. (downwards sloping-diminishing marginal utility)

Excise tax

tax on sales of a particular good or service the demand or supply curve, depending on the scenario, will shift the same amount that excise tax imposes

Income effect

the change in quantity of a good demanded that results from a change in the overall purchasing power of the consumer's income due to a change in the price of that good.

marginal util

the change in total utility generated by consuming ONE ADDITIONAL UNIT of that good or service.

deadweight loss

the decrease in total surplus resulting from the tax (and surplus or shortage from price floors and ceilings), minus the tax revenues generated.

Seller's Cost

the lowest price at which he or she is willing to sell a good

Willingness to pay

the maximum price at which he or she would buy for a good that they desire or need

Total Revenue

the total value of sales of a good or service = P*Q

Price effect (graph p.469)

After a price increase, each unit sold sells at a higher price, which tends to RAISE revenue

Quantity effect (graph p.469)

After a price increase, fewer units are sold, which tends to LOWER revenue

Perfectly inelastic supply

Changes in the price of the good have no effect on the quantity supplied VERTICAL LINE

Price Elasticity of supply

Elasticity of supply shows how sensitive producers are to a change in price (based on time limitations- producers need time to produce more) =(% change in quantity supplied)/(% change in price)

Giffen good

INFERIOR GOOD u-shaped curve facing the positive y-axis (straight budget line at maximum quantity point)

Substitution effect

If price goes up for a product, consumers will buy less of that product and more of another substitute product-with a possibly cheaper price (and vice versa)

Perfectly elastic supply

If quantity supplied is zero below some price and infinite above that price. HORIZONTAL LINE

Inferior good

Income increases, quantity demanded decreases because the good is INFERIOR (snob value-wants to receive a better product) Income decreases, quantity demanded increases because the inferior good becomes MORE VALUABLE (snob value deteriorates- can't afford to be choosy)

Normal good

Income increases, then the demand of the consumer with a higher purchasing power increases (demand curve shifts up/right) Income decreases, the demand of the consumer with a less purchasing power will decrease (demand curve shifts down/left)

Price Elasticity along the demand curve

Point on line where elasticity is equal to 1, unit-elastic. Point on line that is greater than 1, elastic. Point on line that is less than 1, inelastic. The curve is u-shaped faced downwards towards the positive x axis (INELASTIC=RIGHT, UNIT ELASTIC= MIDDLE, ELASTIC= LEFT)

Inelastic

Price elasticity < 1 Downwards sloping (to a lesser degree)

Unit-elastic

Price elasticity = 1 Downwards sloping (at a greater angle than inelastic, but less than elastic)

Elastic

Price elasticity of demand > 1 Downwards sloping (at a greater angle than unit-elastic and inelastic)

Midpoint method (price elasticity of demand)

[(Q2-Q1)/(Q1+Q2)/2]/[(P2-P1)/(P1+P2)/2]

Utility

a measure of personal satisfaction

Marginal utility per dollar

additional utility from spending one more dollar on that good or service. Marginal utility per one unit divided by the change in price from one unit to the next.

principle of diminishing marginal utility

each successive unit of a good or service consumed adds less to total utility than does the previous unit.

Individual consumer surplus

net gain to an individual buyer from the purchase of a good the difference between the buyer's willingness to pay and the price paid (Total consumer surplus is the sum of individual consumer surpluses of all the buyers of a good in a market)

Individual producer surplus

net gain to an individual seller from selling a good difference between the price received and the SELLER'S COST (Total producer surplus- sum of the individual producer surpluses of all the sellers of a good in a market)