Micro Study Guide, Ch 1-4.5

# Micro Study Guide, Ch 1-4.5 - CHAPTER 1 1.3: Real versus...

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CHAPTER 1 1.3: Real versus Nominal Prices nominal price: absolute price of a good, unadjusted for inflation (“current-dollar” price) real price: price of a good relative to an aggregate measure of prices; price adjusted for inflation (“constant-dollar” price) EXAMPLE 1.3 : Real price of eggs in 1970 dollars: o Real price of eggs in 1975= × 1975 1970 CPI CPI nominal price in 1975 o Real price of eggs in 1980= × 1980 1970 CPI CPI nominal price in 1980 CHAPTER 2 2.1: Supply and Demand Supply curve Demand curve Substitutes/complements 2.4: Elasticities of Supply and Demand Elasticity: measures the sensitivity of one variable to another; percentage change in one variable resulting from a 1-percent increase in another Price Elasticity of Demand: percentage change in quantity demanded of a good resulting from a 1- percent increase in its price P Q Q P P P Q Q P Q E p = = = % % 1 < D P E inelastic 1 D P E elastic 1 = D P E unit elastic Linear Demand Curve o bP a Q - = o Price elasticity decreases as you move down the curve o The steeper the slope of the curve, the less elastic is demand o Infinitely elastic demand (─): consumers will buy as much of a good as they can get at a single price, but for any higher price the quantity demanded drops to zero, while for any lower price the quantity demanded increases without limit o Completely inelastic demand ( | ): consumers will buy a fixed quantity of a good regardless of its price Other Demand Elasticities o Income elasticity of demand: percentage change in the quantity demanded resulting from a 1-percent increase in income I Q Q I I I Q Q E I = = o Cross-price elasticity of demand: percentage change in the quantity demanded of one good resulting from a from a 1-percent increase in the price of another; for example, the

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## This test prep was uploaded on 04/07/2008 for the course ECO 405 taught by Professor Mingaling during the Spring '08 term at SUNY Buffalo.

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Micro Study Guide, Ch 1-4.5 - CHAPTER 1 1.3: Real versus...

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