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Final Review - F inal Review M a rginal U tility(148 T he...

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Final Review Marginal Utility (148): The additional utility, or satisfaction, derived from consuming an additional unit of good. Consumer choice (148-150): A consumer will purchase until the marginal benefit equals the price (MB = P). The shape and steepness of the demand curve depends on a person’s marginal utility. Consumer choice is a constant comparison of value relative to price. Demand curve (152): The market demand is simply the horizontal sum of the individual demand curves of consumers. Law of diminishing (148-149): The basic economic principle that as the consumption of a product increase, the marginal utility derived from consuming more of it (per unit of time) will eventually decline. Price levels (151): The amount of product bought in inversely related to its price. Consumer Equilibrium (150) : The formula implies that the consumer will maximize his/ her satisfaction (or total utility) by ensuring that the last dollar spent on each commodity yields an equal degree of marginal utility. Elasticity of demand (153 - 155) : ( also known as the elasticity coefficient ) Elastic: (substitutes are available) Ford raises SUV prices 10% (while others remain the same) – 30% of buyers switch o When the elasticity coefficient is greater than 1 Inelastic: (no good substitutes) All SUV’s raise their prices 10% - 5% of buyers switch o When the elasticity coefficient is less than 1 Unitary: When the price elasticity is exactly 1
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Factors that affect price elasticity of demand (156-158): Availability of substitutes (demand is elastic) Product’s share of the consumer’s total budget Time Elasticity and total revenue (158): When demand is inelastic (cigarettes), the change in the price will dominate and, as a result, the price and total expenditures will change in the same direction . When demand is elastic (fast food hamburgers), the change in quantity will be greater than the change in the price, as a result, the impact of the change in quantity will dominate, and therefore the price and expenditures will move in the opposite direction . Income elasticity (160): The percentage change in quantity of a product demanded divided by the percentage change in consumer income that caused the change in quantity demanded. It measures the responsiveness of demand for a good to a consumer’s change in income. Normal goods: A good that has a positive income elasticity, so that, as consumer income rises, demand for the good rises too. Inferior goods : A good that has a negative income elasticity, so that, as consumer income rises, the demand for the good falls. Elasticity of supply (160): The percentage change in quantity supplied, divided by the percentage change in the price that caused the change in quantity supplied. Maximizing consumer satisfaction, give a budget constraint (167) : price change = income effect + substitution effect Types of firms (171 – 172):
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Proprietorship: A business firm owned by an individual who possesses the ownership right to the firm’s profits and is personally liable for the firm’s debts.
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