PAM 2000 final review

# PAM 2000 final review - PAM 2000 Final Exam Review Terms to...

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PAM 2000 Final Exam Review Terms to know Demand Curve The quantity demanded at each possible price 1 st Law of Demand Consumers demand more of a good the lower its price, ceteris paribus Supply curve Shows the quantity supplied at each possible price Price elasticity of demand Percentage change in quantity demanded in response to a given percentage change in the price p Perfectly elastic: e= - infinity Elastic: e <-1 Unit elastic: e= -1 Inelastic: 0<e<1 Perfectly inelastic: e=0 Income elasticity Percentage change in quantity demanded in response to a given percentage change in income > 0 = normal < 0 = inferior Cross price elasticity Percentage change in quantity demandd in response to a given percentage change of price of another good > 0 = substitutes < 0 = complements Effects of sales tax The more inelastic the demand curve the less of the tax demanders pay, tax falls more heavily on consumer/producer with more inelastic supply/demand Long run v Short run elasticities Always more ELASTIC in the long run Properties of consumer preferences Completeness, transitivity, more is better Indifference curve Set of all bundles of goods that a consumer views as being equally desireable 1. bundles on IC farther from origin are preferred to those on ICs

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closer 2. there is an IC through every possible bundle 3. IC cannot cross 4. ICs slope downward Marginal Rate of substitution Slope of the indifference curve, the maximum amount of one good a consumer will sacrifice to obtain one more unit of another Diminishing marginal rate of subtitution MRS approaches zero as we move down and to the right along and IC Utility function The relationship between utility measures and every possible bundle of good Budget constraint The bundles of goods that can be bought if the entire budget is spent on those goods at those prices Marginal rate of transformation Slope of the budget line, the trade off the market imposes on the consumer in terms of the amount of one good the consumer must give up to obtain more of the other good Deriving demand curve Look at the IC and BC, the price consumption path (the line that connects all the tangent points) then plot on the x axis the quantitites of these points and on the y axis the price of the budget lines Engel curve Shows the relationship between the quantity demanded of a single good and income Giffen Good A good that is both inferior and normal, has a backward bending engel curve Substitution effect
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