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### 14 Cards in this Set

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• Back
 Demand curve shifts when: - When demand variables other than price change Variables that cause a demand curve shift and the effect on demand - Direct relationship: Price of substitute goods Expectations of price increase Consumer income (normal goods only) Size of market - Inverse relationship: Price of complement goods Consumer income (inferior goods only) Group boycott - Indeterminate relationship: Consumer tastes Price elasticity of demand - Measures the sensitivity of demand to a change in price - Arc method: (Change in quantity demanded/Average quantity)/(Change in price/Average price) Interpretation of the demand elasticity coefficient - Greater than 1 = elastic - Less than 1 = inelastic - Elasticity is greater when: More substitutes for good; Larger percentage of income spent on good Relationship between price elasticity of demand and total revenue - Elastic demand: Price increase leads to decreased revenue; price decrease leads to increased revenue - Inelastic demand: Price increase leads to increased revenue; price decrease leads to decreased revenue Income elasticity of demand - (Percentage change in quantity demanded)/(Percentage change in income) - Positive for normal goods; negative for inferior goods Cross-elasticity of demand - Measures the change in demand for a good when the price of another product is changed - (Percentage change in quantity demanded)/(Percentage change in price of other product) - Positive for substitute goods; negative for complement goods; zero for unrelated goods Law of diminishing marginal utility - The more goods an individual consumes the more total utility he receives - However, the marginal utility from consuming each additional unit decreases A consumer maximizes utility when: - When the marginal utility of the last dollar spent on each commodity is the same Consumption function (relationship between personal disposable income and consumption) C = a + bY where C = consumption for a period Y = disposable income for a period a = constant b = slope of the consumption function Marginal propensity to consume (and save) MPC = slope of the consumption function = how much of each additional dollar in personal income that the consumer will spend MPS = percentage of additional income that is saved MPC + MPS = 1 A supply curve shift occurs when: When supply variables other than price change Variables that cause a supply curve shift and the effect on supply - Direct relationship: Number of producers Government subsidies Government price controls Price expectations - Inverse relationship: Change in production costs Technological advances Prices of other goods Price elasticity of supply - Percentage change in quantity supplied resulting from a change in the product price - Elastic if greater than 1, inelastic if less than 1