Unit 1: Micro

Income elasticity of Demand (determines normal or inferior goods)

% change in quantity demanded / % change in income

Price elasticity of demand

% change in quantity demanded / % change in price

Cross price elasticity of demand (determines substitutes or compliments)

% change in quantity demanded of good X / % change in the price of good Y

Price elasticity of supply (measures response of suppliers to change in price)

% change in quantity supplied / % change in price

Percent change

(new - old / old) x100

Perfectly Elastic

= infinity there are many substitutes available, good is a luxury

Unit Elastic

=1 as price goes up and down, total revenue stays the same

What explains why the demand curve for a normal good is downward sloping?

The income and substitution effects move the quantity demanded in the same direction

For an inferior good, an increase in consumer income will cause what?

the demand curve will shift to the left

What can explain why a decrease in the price of a normal good will lead to an increase in the quantity demanded of the good?

A lower price will increase consumers' purchasing power

last year 17 million tons of beans were sold for $300 per ton. this year 17 million tons of beans were sold for $285 per ton. which of the following changes in demand and supply could have caused this outcome?

Demand - indeterminate quantity - increase

Promoters of a rock group know that if they charged $8 a ticket, 400 people would buy tickets for a concert, and if they charged $4 a ticket, 800 people would buy tickets. What is the demand for the concert tickets for the rock group?

Elastic (800-400/400) x100 / (4-8/8) x100 = 2

Assume that good X id a normal good and good Y is an inferior good. how would the income effect of the increase in the price of good X affect the purhcases of good X and Y

Good X = decrease Good Y = Increase

The cross-price elasticity of demand between good X and good Z measures the percentage change in the quantity demanded of good X in response to a percent change in...

Good Z

Relatively inelastic

Less than one, but not zero - little to no close substitutes, good is a necessity and may even be addictive price = revenue

assume that a consumer only buys 2 goods: X and Y. what is the utility-maximizing decision rule for the consumer in allocating total income to good X and good Y

MUx/PX = MUy/Py

does price change when a price ceiling is put into place if the equilibrium price is below the ceiling?

NO, it will be unaffected

Loss

P < ATC

Normal profit

P = ATC

Profit

P > ATC

assume the market for milk is currently at equilibrium. a breakthrough in bottling technology decreases the production costs of milk products. price, quantity, and consumer surplus will most likely changes...

Price - Decrease Quantity - increase Consumer surplus - Increase

If a severe drought destroys a significant portion of the peanut crop and peanut farmers' revenues increase, what is true of the observed range of prices?

The demand for peanuts must be price inelastic

marginal utility

an additional satisfaction gained from consuming one additional unit of a good

what would cause the supply curve for notebook computers to shift to the right?

an increase in the number of firms producing notebook computers

what would cause the demand curve for good X to shift to the right?

an increase in the price of good Y, a substitute for good X

marginal analysis formula

change in total utility/ change in quantity

the difference between the price a person is willing to pay for an ice cream cone and the market price they did pay is...

consumer surplus

one reason consumers typically increase the quantity of a good they purchase when the price of the good decreases is that

consumers' purchasing power increases

following a prolonged power outage, the price of flashlights normally increases equilibrium. if cities had passed laws prohibiting price increases for flashlights, during power outages such laws would most likely...

create a shortage for flashlights

marginal analysis

examination of the benefits of activity compared to the additional costs incurred by that same activity

Moving from left to right along a downward sloping linear demand curve, price elasticity varies in what way?

first elastic, then unit elastic, and finally inelastic

Relatively elastic

greater than 1 as price increase total revenue decreases

when marginal utility is falling but positive, total utility will

increase at a decreasing rate

Perfectly inelastic

quantity does not respond at all to changes in price (E=0) price = revenue

If a 10% increase in the price of a good leads to a 25% decrease in the quantity demanded of the good, demand is

relatively elastic 25/10 = 2.5>1

law of diminishing marginal utility

the additional satisfaction received from consuming extra units of a good decrease as consumption of the good increases

At her current level of consumption, a consumer is willing to pay up to $1.50 for a bottle of water and up to $1,500 for a diamond ring because the

the marginal utility of a bottle of water is less than the marginal utility of a diamond ring

Relative to a command economy, resources in a market economy are more commonly allocated by...

the price system

A perfectly competitive market in equilibrium is allocatively efficient and it maximizes...

the sum of total consumer surplus and total producer surplus