CLEP Microeconomic Notes 1

Ii perfectly inelastic demand is represented by a

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i.i) Perfectly inelastic demand is represented by a vertical line i.ii)Slope = infinity i.iii) Changes in price do not effect demand 42) Unit Price Elastic – when the total revenue (TR) is the same regardless of price a) When an increase or decrease in prices does not change the total revenue (TR) = Unit elastic a.i) 1.00 x 100 = 100 a.ii) 2.00 x 50 = 100 43) Cross-Price Elasticity of demand – measures the effect that a change in the price of one good has on the price of another good a) Cross Price Elasticity of Demand = % of change in the quantity demanded for good “X” divided by % change in price of good “Y” b) Negative cross-price elasticity – when the demand of two goods are complements c) Positive cross-price elasticity – when the demand of two goods are substitutes 44) Utility – the satisfaction a consumer receives as a result of purchasing a good or service 45) Marginal Utility – is the satisfaction from each additional unit consumed 46) Total Utility – the satisfaction received from all of the product consumed a) When total utility is maximized – marginal utility is zero
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47) Diminishing Marginal Utility – a) Ex: all you can eat buffet, not as much satisfaction is received from the last plate as the first plate 48) Reservation Price – amount that a consumer is willing to pay for a good a) Difference between reservation price and actual price is consumer surplus 49) Consumer Surplus – graphically illustrated ABOVE the market price and below the demand curve the triangle above the market equilibrium price a) The difference between what a consumer is willing to pay and what he actually paid a.i) Willing $10 actually paid $3 = $7 consumer surplus 50) Producer Surplus – graphically illustrated ABOVE the market price and above the supply curve the triangle above the market equilibrium price 51) Total Revenue (TR) = Price (P) x Quantity (Q) 52) Deadweight – the total surplus (producer + consumer surplus) lost as a result of taxes, market imperfections or other factors a) a loss when the price is increased above market level and results in a loss to both the consumer surplus and producer surplus Wages and Labor 53) Transfer Payments – Medicaid, Medicare, social security, food stamps, housing assistance, welfare 54) Lorenz Curve – economists consider this to be a measure of social inequality 55) Gini Ratio – another measure of social inequality a) Gini ratio of zero (0) means each family has equal income b) Gini ratio of 1, means that one family is receiving 100% of the income in society 56) Income Effect – a change in consumption (up or down) as a result of a change in real income 57) Real Income – is actual income adjusted for all other factors including increasing prices of goods and services as well as inflation 58) Non-Rival Good - is a good that has zero marginal cost for providing the good to additional consumers 59) Rival Goods – Private goods, T.V. 60) Non-Exclusive Good – Common Goods, and Public goods
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ii Perfectly inelastic demand is represented by a vertical...

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