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14 Cards in this Set
- Front
- Back
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Demand curve shifts when:
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- When demand variables other than price change
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Variables that cause a demand curve shift and the effect on demand
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- 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 |
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Price elasticity of demand
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- Measures the sensitivity of demand to a change in price
- Arc method: (Change in quantity demanded/Average quantity)/(Change in price/Average price) |
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Interpretation of the demand elasticity coefficient
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- Greater than 1 = elastic
- Less than 1 = inelastic - Elasticity is greater when: More substitutes for good; Larger percentage of income spent on good |
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Relationship between price elasticity of demand and total revenue
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- 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 |
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Income elasticity of demand
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- (Percentage change in quantity demanded)/(Percentage change in income)
- Positive for normal goods; negative for inferior goods |
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Cross-elasticity of demand
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- 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 |
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Law of diminishing marginal utility
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- The more goods an individual consumes the more total utility he receives
- However, the marginal utility from consuming each additional unit decreases |
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A consumer maximizes utility when:
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- When the marginal utility of the last dollar spent on each commodity is the same
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Consumption function (relationship between personal disposable income and consumption)
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C = a + bY
where C = consumption for a period Y = disposable income for a period a = constant b = slope of the consumption function |
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Marginal propensity to consume (and save)
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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 |
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A supply curve shift occurs when:
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When supply variables other than price change
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Variables that cause a supply curve shift and the effect on supply
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- Direct relationship:
Number of producers Government subsidies Government price controls Price expectations - Inverse relationship: Change in production costs Technological advances Prices of other goods |
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Price elasticity of supply
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- Percentage change in quantity supplied resulting from a change in the product price
- Elastic if greater than 1, inelastic if less than 1 |
