Microeconomic Principles (Mankiw 4,5).....Final !!!!!!

1. Explain the effect an income change might have on shifting the demand curve?

Income change causes the demand curve to shift either to the right or to the left. RIGHT=On normal goods, it shifts the demand curve to the right. That is as income increases, demand for normal goods increase. LEFT=On inferior goods, it shifts the demand curve to the left. An increase in income, demand for inferior goods decrease.

7. What is income elasticity and how is it measured?

Income elasticity is how much the quantity demand of good responds to a change in consumer's income. It is measured by percentage change in quantity demanded divided by the percentage change income.

11. Can you summarize the 3 types of elasticity, their equations, purpose and outcomes?

Income elasticity of demand=percentage change in quantity demand divide by percentage change demand by income. Cross elasticity of demand= Price elasticity of demand=

2. What is the difference between a normal good an inferior good? Explain.

Normal goods =are when your income increase, you buy more of something that is normal good Inferior goods = when your income decrease, you end up buying less of somethings. ***It all depends on what you are spending your money on.

5. What other factor might influence the position of the demand curve?

Other factors that might influence the position of the demand curve are: Prices of related. Goods:: it could be complement or subsitutite Tastes( Preferences)= old phone vs cell phone Expectations about the future= A rise in the expected future price of a good increases the current demand for that good. (Example:Expect an increase in income, cause an increase in current demand) (Example:Expect higher prices, increase in current demand, like buying a house). Number of buyers=Market demand-increase ( will shift demand curve to the right)

3. Explain how the price of related goods is related to changes in the demand curve?

Price in related goods is related to changes in the demand curve because it leads to an increase or decrease for the related product. *If they are two substitute goods they move the Same direction. If they are two complements they move in the opposite direction. Example: Price increase in coke, so it will cause an increase demand in the related good, Pepsi. Example: Price decrease in computer, so it will cause a decrease in demand for a typewriter.

14. In the net, how are price (P) and quantity (Q) changed by a simultaneous decrease in demand and supply?

Price will be ambigious and quantity will decrease

15. In the net, how are price (P) and quantity (Q) changed by a simultaneous decrease in demand and increase in supply?

Price will lowers and the quantity will be ambigious

10. What is cross-price elasticity? How is this defined and what result comes from this measure of elasticity?

The cross-price elasticity of demand is used to find out how customers response to the change in price to substitute goods (example coke and Pepsi) (same direction)and complementary goods (example gasoline and car) (opposite direction). Exy= percentage change in quantity demanded of product x. Divided by percentage change in price of product y. (If you get a negative result you are dealing with two complements and if you get a positive result you are dealing with two substitute goods)

6. What numerical value determines whether or not a product/service is considered price elastic versus inelastic?

The numerical value >1=elastic, if it is <1 it is inelatic

12. In the net, how are price (P) and quantity (Q) changed by a simultaneous increase in demand and supply?

The price could up, down, or stay the same, and quantity increases. The price is ambiguous, reason why is because they don't tell you exactly how much they increase.

13. In the net, how are price (P) and quantity (Q) changed by a simultaneous increase in demand and decrease in supply?

The price increases and quantity is ambigious

8. What is price elasticity of demand? Explain the distinctions between elastic, inelastic, and unit elastic.

The price of elasticity of demand measures how customer response to price changes. It is the percentage change in quantity demanded divided by percentage change in price You can calculate it by this formula: (Q2-Q1)/(Q2+Q1)/2 divided by (P2-P1)/(P2+P1)/2 (this is the midpoint method) (Use the absolute value) Elastic demand=quantity demanded responds strongly to changes in prices. Price elasticity of demand (Ed) is greater than one. (>1). If demand is elastic, Total Revenue (TR) decreases when you raise the price. Otherwise it wont do anything. Inelastic demand=quantity demanded does not respond strongly to price change. Price elasticity of demand (Ed) is less than one. (<1). If demand is inelastic, Total Revenue(TR) increases, if you raise the price. Otherwise it wont do anything. Unit elastic=quantity demanded and price change the same percentage. Price elasticity of demand (Ed) is equal to one. (1) Perfectly inelastic demand=quantity demand and price change is equal to 0 (zero). The demand curve is vertical. Perfectly elastic demanded=quantity demand and price equals infinity. The demand curve is horizontal

4. If Luke and I are the sellers of paper in a given market, and Luke drops his prices for paper, how will this impact the demand for my paper? Which way will the the demand curve shift?

The two goods are substitute goods. If Luke drops his price for paper, it will shift the demand curve to the left.

9. What two results stem from income elasticity? Why is this important to an economist?

The two results stem from income elasticity is finding out how the income changed demand on normal goods or inferior goods. It is important because when the economy is doing good economist can determine which products/services will sell and which inferior goods will decrease in sells. (If you get a negative result that means you are dealing with an inferior product, and a positive result means you are dealing with normal good)