Microeconomics Intro Flashcards

Terms Definitions
the discrepancy between limited resources and unlimited desires.
Basic Economic Questions
What? How? and For Whom?
Basic Economic Question 1. What?
What goods and services to produce? demand is determiner, price is indicator.
Basic Economic Question...2. How?
How best to produce the goods and services determined by 'What?', Determine which of 4 basic resource groups you will use. Labor, Capital, Land, Entrepreneurial and how much of each.
Basic Economic Question...3. For Whom?
Distribution. capatilist systems may use marketing - to those who can afford to buy and some subsidies.,
4 Economic Systems
1. Traditional (barter), 2. Capitalist, 3. Socialist, 4. Mixed.
Traditional Economic System
The Barter System. trading one product for another. Works best in small economies-in large economies requires much trading to get goods one actually wants or needs.
Capitalist Economic System
Market Economy or Free Enterprise or Laissez-faire ("let it be"). Private business free to operate and compete with very little government regulation. Value of goods and services determined by competitive market-requires many buyers and sellers to avoid monopolies.
Market Economy
Capitalist System
Free Enterprise
Capitalist System
"let it be" in french. Describes Capitalist System of little to no government involvement.
The Invisible Hand
Used in Wealth of Nations by Adam Smith to describe why, though the individual is selfish, his actions can also benefit the whole community.
Adam Smith
Scottish philosopher wrote The Wealth of Nations. Considered the father of economics.
The Wealth of Nations
written by Adam Smith.
Conditions required for the invisible hand to work
1. stable property rights, 2. economic freedom to use property or consume whatever people wish.
Property Rights
1 of 2 conditions necessary for the invisible hand of the free market/capitalist system to work. Requires that people have a clear, stable, continuing right to personal property.
Economic freedom is required for the successful _______ effect.
1 of 2 conditions required for the 'invisible hand' of the free market/capitalist system to work. People must be able to own and or consumer what they wish.
Competition (define for free market)
in a free market it is a process of discovering new and better ways to use resources.
Social Cooperation and the Market
free markets require the participation of the consumer to determine the real value of goods and services. The consumers require the cooperation of the producers to respond to demand/price and provide those products and services consumers value.
The Socialist System
1 of 4 basic economic systems. aka centerally-planned system or command economy. private enterprise abolished, government owned property and economic planners decide what, how and for whom, prices and wages set by planners. System is difficult to manage because no venue for reliable informaiton for planners to act on.
Mixed Economy
1 of 4 basic economic systems. government plays a role along side the private sector.
One way to determine relative economic freedom in a country
determine how much of the GDP is made up of government spending. The more government spending, the less consumer input the market receives.
Gross Domestic Product
Opportunity Cost
the difference in cost/resources used/time between action chosen and the best foregone alternative 
(produce another product, be in one place rather than another)
Opportunity Cost formula
opportunity costs = losses/gains or opportunity costs = best option foregone-choice made.
Production Possibilities Curve (PPC)
reflects the maximum number of goods that a society can produce at any given time, with the given resources and know-how (technology). Note: reflects Technical Efficiency, not Economic Efficiency. Does not take into account what society wants, just the most efficient use of resources.
3 assumptions when studying Production Possibility Curve
a) resources (land, labor force, capital and entrepreneurship skills)are fixed, but each of the resources can be used to produce different types of goods and services. b)all the resources are fully and efficiently used. c)Technology (know-how) which includes the quality of the capital (machinery) and the education of the labor force, stays as it is. (know-how is assumed to remain constant for the given period.
Shape of the Production Possibilities Curve
concave as a result of the increasing opportunity costs. Also called a frontier line or boundary.
Unattainable Area "U"
the area beyond the Production Possibility curve/boundry/frontier that indicates an unattainable outcome due to insufficient resources or know-how.
Inefficient Region "I"
The area within the Production Possibility curve which indicates production that does not efficiently utilize all resources and know-how.
Efficient Use of Resources
when an economy is producing at its maximum. Indicated by existing on the Production Possibility Curve/boundry/frontier.
Opportunity Cost on a Straight Line
Indicates that the opportunity cost is constant because there is a one for one exchange for each available option.
4 Factors that shift the Production Possibility Curve to the right
Shifting PPC to the right indicates an increase in production ability. This can be due to: a) technology. b) increase in resources. c) increase in quality and/or quantity of population. d) capital formation (foregoing immediate consumption to devote resources to creation of capital goods that will increase productivity).
Factors that shift the Production Possibility Curve to the left. (4)
Shift of the PPC to the left indicates a decrease in production ability. a) depletion of natural resources. b) population quality or quantity reduction. c) natural disasters. d) war.
Partial shift in Production Possibility Curve
reflects an increase or decrease in ability to produce in less than all sectors represented by the PPC.
Rule of 72
the formula used to indicate the length of time necessary to double principal based on interest rate earned. divide 72 by rate to get number of years to double principal. Years to Double Pricipal=72/rate. 100 will double at 3% interest in _____ years. (24 years)
Technical Efficiency
using the least resources possible to produce a given level of output
Economic Efficiency
applying resources to produce goods or services that society's members value most highly.
What is the difference between Technical and Economic Efficiency
Technical Efficiency reflects the most effienct use of the 4 key limited resources, but doesn't reflect if the model efficiently meets the needs/desires of society (economic efficiency).
Pareto Efficiency
A change in resource allocation between two or more producers that makes those involved in one activity better off without making those involved in another activity worse off. This doesn't mean that everyone has to be better off, only that gains should exceed losses.
_______ is the fundamental economic problem that human wants exceed the availability of time, goods, and resources.
________ is the study of how individuals and society choose to allocate scarce resources to satifsy unlimited wants.
Factors of production classified as: land, labor, and captial are also called ________.
___________ applies an economy wide perspective which focuses on such issues as inflation, unemployment, and the growth rate of the economy.
_________ examins small units of an economy, analyzing individual markets such as the market for personal computers.
A simplified description of reality used to understand and predict economic events is called a (an)________.
If the ________ assumption is violated, a model cannot be tested.
Ceteris Paribus
_________ uses testable statements.
Positive Economics
_______ is a shorthand expression for any natural resource provided by nature
The physical plants, machinery, and equipment used to produce other goods is ________.
The mental and physical capacity of workers to produce goods and services is _______.
______ is the creative ability of individuals to seek profits by combining resources to produce innovative products.
_______ is an analysis based on value judgment
Normative Economics
The condition of scarcity:a) cannot be eliminatedb) prevails in poor economiesc)Prevails in rich economies.d) All of the above.e) None of the above.
The condition of scarcity can be eliminated if:c) people satisfy needs rather than false wants.b) sufficient new resources were discovered.a) output of goods and services were increased.d) none of the above.
Which of the following is not a factor of production?a) a computer chipb) the service of a lawyerc) dollarsd) all of the above are factors of productione) none of the above are factors of production
A textbook is an example of a) capital b) a natural resource c) labor d) non of the above
The subject of economies is primarily the study of:a) the government decision-making processb) how to operate a business successfullyc) decision-making because of the problem of scarcityd) how to make money in the stock market.
Which of the following is included in the study of macroeconomics?a) salaries of college professorsb) computer pricesc) unemployment in the nationd) silver prices
Microeconomics approaches the study of economics from the viewpoint of:a) individual or specific markets.b) the national economyc) government unitsd) economywide markets.
The definition of a model is a: a) description of all variables affecting a situation b) positive analysis of all variables affecting an event. c) simplified description of reality to understand and predict an economic event. d) data adjusted for rational
Which of the following is a positive statement?a) I think we should pass a constitutional amendment to reduce the deficit.b) President Clinton's way of dealing with the economy is better than President Bush's.c) I hope interest rates come down soon.d) if
An increase in the federal minimum wage will provide a living wage for the working poor is a:a) statement of positive economics.b) fallacy of composition.c) tautology.d) statement of normative economics.
Select the normative statement that completes the following sentence: If the minimum wage is raised:a) cost per unit of output will rise.b) workers will gain their rightful share of total income.c) the rate of inflation will rise.d) profits will fall.
The government should provide health care for all citizens." This statement is an illustration of:a) positive economic analysis.b) correlation analysis.c) fallacy of association analysis.d) normative economic analysis.
The software programs that make computer hardware useful in production and management tasks are:a) capitalb) laborc) a natural resourced) none of the above.
The federal minimum wage causes higher unemployment among teenagers" is a: a) statement of positive economics.b) statement of normative economicsc) testable value judgementd) fallacy of composition
All human wants cannont be satisified because of the problem of scarcity.T or F
Economics is the study of people's making choices faced with the problem of unlimited wants and limited resources.T or F
Policies to determine the price of troll dolls are a concern of macroeconomics.T or F
Policies to increase the supply of money in the economy are primarily a concern of microeconomics.T or F
The statement "A tax hike for the rich is the fairest way to raise tax collections" is an example of positive economic analysis.T or F
The statement "It would be better to put up with price controls than to have continuing higher medical care prices" is an example of normative economic analysis. T or F
The statement "cutting government spending is the best way to boost consumer confidence" is an example of normative economics.T or F
The statement "American workers are lazy" is an example of positive economic analysis.T or F
An individual that seeks profits by combining resources to produce innovative products
The basic categories of inputs used to produce goods and services
The mental and physical capacity of workers to produce
A natural resource
Man-made goods used to produce other goods
_________ economics is an analysis limited to satements that are verifable by reference to facts.
A phrase that means that while certain veriable change, "all other things remain unchanged or constant."
Ceteris Paribus
The study of how society chooses to allocate its scare resources to satifsy unlimited wants.
_________ economics is an analysis based on value judgement which cannont be proven by facts.
The condition that human wants are forever great than supply
A simplified description of reality
The ________ (a) problem concerns the division of output amont society's citizens. The ______ (b) question ask exactly which goods are to be produced and in what quantities. The ______ (c) question requires society to decide the resource mix used to produ
(a) for whom(b) what(c) how
__________ is the best alternative foregone for a chosen option
Opportunity costs.
The basic approach that compares additional benefits of a change against the additional costs of the change is called _______
Marginal analysis
The ________ represents the maximum possible combinations of two outputs that can be produced in a given period of time. Inefficient production occurs at any point inside the curve and all points along the curve are efficient points.
Production Possibility Curve (PPC)
The ________ states that the opportunity cost increases as production of an output expands.
Law of Increasing Opportunity Cost.
________ occurs when the production possibilities curve shifts outward as the result of changes in the resource base or advance in technology.
Economic growth
Factories, equipment, and inventories produced in the present are called _____ which can be used to shift the production possibilities curve outwarde in the future.
The body of knowledge and skills applied to how goods are produced is ______.
Which of the following does not illustrate opportunity cost? (a) if I study, I must give up going to the football game. (b) if I buy a computer, I must do without a 35" television. c) More consumer spending now means more spending in the future. d) If I s
The accumulation of capital is known as _______.
The basic economic question of which resources to use in production
The basic economic question of which goods and services to produce
The best alternative sacrificed
Opportunity Cost
The application of knowledge to production
An outward shift of the production possibilities curve
Economic growth
The ______ possibilities curve shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology.
The basic economic question of who receives goods and services
For whom
_______ analysis means additions to or subtractions from a current situation.
study of the efficient allocation of limited resources amont the unlimited wants.
4 key limited resources
labor, land (including all natural resources), captial (not money)(man made goods used to produce something else), Entrepreneurial skills
Average rate of annual economic growth in US over last 60 years.
Economic Growth expressed by
GDP (Gross Domestic Product)
formula used to determine rate of growth
What is major driver of economic growth
Functional notation
y=f(x) which is dependent, which is independent
y is dependent, x is independent
express how exconomic growth relies on captial with a functional notation
economic growth = f(capital)
Positive relationship - define
when two items with a functional relationship move in the same direction, if one increases the other increases or vis-versa.
Positive relationship - aka
direct relationship
Negative relationship - define
when two dependent items react oppositely of each other. If one goes up the other goes down (increase/decrease)
Negative relationship - another term
indirect relationship
innovators, risk takers, experienced, educated, managers, COO, CEO, CFO
relationship between risk and reward is:(a) direct (b) indirect
Formula needed to calculate future value with rate, time and principle
FV=PV(1+R) to the power of NFuture Value=Present Valuex(1+rate) to the power to time units.
limits to economics resources
resources - define
factors of production
capital - define
all human made goods used to make more consumer or capital goods.
Entrepreneurial skills
skills of creating, managing human and other resources to provide desired goods and services at a profit.
Concept of Scarcity
limits to 4 key resources
Consumer goods - define
items for personal use
concerned with household, firms and government
overall view of the economy (aggregate level of national output of goods and services.
Economic Models - must meet 3 requirements:
1. simplify reality2. predict future events precisely.3. predictions can be validated.
Ceteris Paribus
assumption all other variables remain unchanged.
Positive statement
fact without opinion/judgement
Normative statment
opinion/judgement (may include positive statement)
Post Hoc Fallacy
false thinking that because A precedes B, then B must be caused by A.
Cause and Cure - define
posing a cure or identifying a cause without proper testing
Real Return
return on investment after inflation has been taken into account.
GDP for US in 2010
formula that shows profit
profit = revenues-expenses.
Elasticity - define
responsivness of consumer
3 basic Economic Questions
What, How and For Whom?
increase in demand will ________ equilibrium price and ________ equilibrium quantity.
Increase in both cases.
increase in demand can be due to: 5 factors
1. price of other goods. 2. increase in population. 3. changes in taste. 4. increase in income. 5. changes in expectations.
Quantity demanded
a change from one point to another along one demand curve. Either decreases or increases Quantity demanded. Can only be effected by change in price per unit.
Increase in price per unit will decrease __________
Quantity demanded
Increase in quantity demanded is caused by
decrease in price per unit
decrease in quantity demanded
reflects increase in price per unit
Decrease in price per unit will cause
increase in quantity demanded.
price per unit and quantity demanded have a _______ relationship.
indirect, inverse or negative relationship.
slope = (formula)
change in y/change in x
The Law of Demand
assuming ceteris paribus (all things constant except price) more goods will be purchased at lower prices or fewer goods will be purchased at higher prices. When prices goes down, we buy more; when price goes up we buy less.
Factors that remain constant during price change (5)
size of the population 2)consumer's incomes 3) tastes 4) epectations 5) price of other goods on the market.
Demand Schedule (define)
list of different quantities of a product or service that a person is willing and able to buy at different prices over a specified period of time, assuming ceteris paribus (all other things constant).
substitute goods (define)
goods that have similar use and give nearly similar satisfaction
Normal Good (define)
a product for which demand increases with an increase in population income.
Inferior Good (define)
a product for which demand increases with a decrease in population income. (99cents only stores)
Change in quantity demanded (define)
a move along the Demand curve caused by price of the product.
Change in Demand Curve (shift right or left) demand
Anything that effects a shift in the entire demand curve caused by anything that effects your willingness to buy other than price of the product.
Investment (define)
the accumulation of capital
The Law of Diminishing Marginal Utility
The more of a product that is consumed, the less satisfication (utility) the consumer will derive. Therefore, in order to sell more of a product, the price of the good has to progressively decrease as utility (satisfaction) decreases.
Demand Schedule
list of the different quantities of a product or service that a person is willing and bale to buy at different prices over a specified period of time while keeping all other factors constant. ceteris parubis
Three reasons why Demand Curve slopes downward
1) substituttion effect. 2) Real income effect 3) The Law of Diminishing Marginal Utility.
Substitution Effect
when the price of one product goes up people will buy another product or service that is similar in use and that gives nearly the same satisfaction as the first product.
Real Income Effect
when prices drop, consumers enjoy a savings which translates to increased buying power or income.
How do you calculate a market demand curve?
add together all quantities demanded at each price (horizontal summation). Add tables across (total derived is point on graph at that price).
Price Theory
the study of Supply and Demand.
Quantity supplied > Quantity demanded
Quantity demanded > Quantity supplied
Quantity demanded = Quantity supplied
Buyer's market (define)
existance of a surplus
Seller's market (define)
existence of a shortage
Equilibrium Price
The price at which the willingness to buy and the willingness to supply meet and the market is cleared or all buyers get a product and all products are sold.
Change in quantity demanded
effected by price only
Change in demand
effect by anything but price.
Factors that determine demand (5)
Income (normal goods income has direct relationship, inferior goods and income have an inverse relationship), taste and preference, price of other goods (substitute goods and an inverse relationship with each other, complementary goods have a direct relationship with each other), consumer expectations and population.
difference between changes in quantity supplies and Supply.
Quantity supplied effected by price only, Supply effected by all other things.
Which way does the Demand curve slope
which way does the supply curve slope
Factors that determine supply (8)
Technology. 2)price of inputs. 3) price of other goods. 4. Size and number of firms. 5) producer expectations. 6. Taxes (per unit). 7. Subsidies (per unit). 8. Government law.
Technology as it determines Supply
increases in technology allow the more effiecient use of other resources at all price levels, thereby shifting the supply curve to the right. The inverse can be true with the loss of technology.
Price of inputs as it determines Supply
aka factors of production. Inputs or factors of production are the resources needed to produce, therefore the increase or decrease in price of a given input will directly determine the price of production at all price levels or will shift the Supply curve right or left.
Price of other goods as they determine Supply
substitutes of production are goods that can be produced with the same resources (inputs). If the price of one good increases more inputs will be devoted to creating that good, thereby reducing the amount of resources devoted to product of the substitute good. complements in production: goods for which increase in production of one leads to increase in production of another. If cereal become more popular, the cost will go up, price of corn will go up, cost of ethanol will go up because corn costs more.
Size and number of firms as it pertains to determining Supply
if only one firm, then a monopoly they will limit supply in order to raise prices, many firms they will increase supply.
Producer's expectations as it determines Supply.
If producers expect high demand they will produce more, if they expect low demand they will produce less.
Taxes (per unit) as they determine Supply.
An increase in cost (taxes) will shift the supply curve to the left, reducing supply. opposite is also true.
Subsidies (per unit) as they determine Supply.
subsidies reduce the cost per unit of a good, thereby encouraging producers to supply more.
Gpverm,emt ;aws as tjeu determine supply.
a) licenses limits the number of producers thereby decreasing Supply (see # of firms). b) Import quotas aslo limit the number of producers - see a
Substitutes in Production change the equiilibrium qunatity in ______ direction
the opposite.
Complements in Production change the Equilibrium Price _______ direction.
the same.
Laws of Supply and Demand 4 basic situtations:
1) Increase in Demand. 2) Decrease in Demand. 3) Increase in Supply. 4) Decrease in Supply.
Increase in Demand as it applies to Supply and Demand
Increase in Demand is always accompanied by an increase in the equilibrium price and equilibrium quantity.
Decrease in Demand as it effects Supply and Demand
Any decrease in demand is always accompaniedby a decrease in equilibrium price and equilibrium quantity.
Increase in Supply as it effects Supply and Demand
Increase in Supply = decrease in equilibrium price and increase in the equilibrium quantity.
Decrease in Supply as it effects Supply and Demand:
decrease in supply = increase in equilibrium price and decrease in equilibrium quantity.
Increase in Supply and Demand
when consumers wants something, but other increases (say in technology) make it cheaper to produce: even though demand should set a higher equilibrium price, the lower cost to produce due to other factors wants to set a lower equilibrium price. Three possibilities: 1) if Supply and Demand increase equally, equilibrium price stays the same. 2) if demand increases more than supply then the equilibrium price will increase. 3) if supply increases more than demand then the equilibrium price will decrease. Only sure thing is that equilibrium quantity will increase. Equilibrium price is indeterminate.
What will Equilibrium Price do when Supply and Demand both increase or decrease similtaneously?
It is indeterminate. it can stay the same, increase or decrease depending on the amount of decrease or increase of each of supply and demand.
What will happen to equilibrium quantity when Supply and Demand both increase.
It will increase.
What is the only outcome we can be sure of with increasing Supply and Demand
that Equilibrium Quantity will increase. Equilibrium Price is indeterminate without specific info on the increase of Supply and Demand.
Increase in Demand, Decrease in Supply
Equilibrium Price will increase, but Equilibrium Quantity will be indeterminate.
Decrease in Supply and Demand
Equilibrium quantity will decrease, but Equilibrium Price is indeterminate.
Decrease in Demand, increase in Supply
Equilibrium Price will decrease, but Equilibrium Quantity will be indeterminate.
Price ceilings, - maximum price
(such as rent control): price is deliberately set below the equilibrium. Result in shortages.
Black Market
when price of product is legally set below the equilibrium price, some consumers may be willing to pay a higer price than legal. This is the existence of a 'black market'.
Determining black market price:
draw a horizontal line from the legally set price to the supply curve. from this point, draw a vertical line to the demand curve. from this point draw an horizontal line to the y axis.
Price Floor (minimum price)
governments set minimum prices for goods so that producers can improve their income. Prices can go higher but not lower.
When a price floor or ceiling are removed what happens to price of goods or service?
price will return to equilibrium price.
when the government intervenes in the economy by shifting either supply or demand what is it called?
the government is "working throug the market".
Cobweb Theorem
the graphical interpretation of the condition set when high prices prompt increase in production which then prompts decrease in prices which then prompts dcrease in production which increases prices, which increases production and so on.
on the Supply and Demand graph, the units supplied will be expressed by ______.
The equilibrium point at which the Supply and Demand curve meet.
On the Supply and Demand graph the amount of goods produced at a particular price point which is greater than or equal to the equilibrium Price is expressed by _______
The point at which the horizontal line drawn from the price intersects with the Supply Curve or the horizontal line drawn from that point (called the equilibrium point) to the x axis.
Study how to page 78 of text book
Fallacy of Composition
Generalizing from personal experience
Market (define)
a place where one can buy and sell a product and negotiate a price.
Economics - define word
greek origins, skilled in household management
another way to say resources (generalized)
factors of production
Entrepreneurial skills
skills of creating and managing human and other resources to make a profit. risk takes
Reward for using Land to produce goods and services is
reward for using labor to produce goods and services is
reward for using capital to produce goods and services is
Reward for using Entrepreneurial skills to produce goods and services is
ceteris Paribus
all other variables remain unchanged or equal.
Occam's Razor
of various explanations choose the simplest (in econ - get rid of all but the most important factors).
The Fallacy of Composition (define)
what is good for one person is good for all such as standing up at a ball game is good for one, but may not improve view if everyone did it.
The Post Hoc Fallacy (define)
after this, therefore because of this. thinking because event A precedes event B, then event A caused event B.
Cause and Cure (define)
proposing a cure for a problem without propert testing, such as Reagan era tax cut meant to encourage savings, instead public spent the money. aka jumping to conclusion about cause and effect simply because two events occur in temporal succession.
Difficulty in Predicting Human Behavior (define how a problem with Econ)
can conduct lab experiments in which all variables can be controled, can only try to predict average behavior of a population.
Independent variables are also called
exogenous variables
Dependent variables are also called
endogenous variables
decrease in supply, ceteris paribus = ________ in the equilibrium quantity sold and a ______ in the equilibrium price.
price elasticity of Demand (define)
the relative change in quantity demanded due to a relative change in price.
Formula to determine Price Elasticity of Demand
Ed= % change Qd / # change Pd or (Q1-Q2/.5(Q1+Q2))/(P1-P2/.5(P1+P2))
perfect inelasticity (define)
elasticity equal to zero. Demand curve is perfectly verticle.
relative inelasticity (define)
elasticity between zero and one
unitary elasticity (define)
elasticity equal to one
relative elasticity (define)
1 < elasticity > infinity
perfect elasticity (define)
elasticity equal to infinity. Demand curve is perfectly horizontal.
The steeper a demand curve the more _____ it is.
The flatter a demand curve the more ______ it is.
3 factors that influence price elasticity of demand
substitute goods, disposable income spent on the particular good and the duration of the price change.
If demand is elastic, then a price increase will ______ Total Revenue
If demand is inelastic, a price increase will ________ total revenue
formual for Total Revenue is
Price x Quantity TR=P*Q
If a 1% change in price causes less than a 1% change in quantity demanded then demand is __________
inelastic and the price change will cause an increase in the TR.
price increase when Ed is inelastic, then TR will ________
Price (P) and Total Revenue (TR) have a positive relationship when Ed is
Price (P) and Total Revenue (TR) have a negative relationship when Ed is _______
If a greater than 1% change in price = a greater than 1% change in quantity demanded, then demand is
elastic and will cause a decrease in total revenues (TR)
find out how to calculate the total increase or decrease in revenue and quantity demanded by using the Ed and TR formulas
A 1% increase in price = a 1% change in quantity demanded (Qd) it is ______
unitary elastic and a price change does not change total revenue. (should lower prices to garner 'goodwill').
If the Ed of a good is unitary elastic or unit elastic, one should ________
lower the price, because it will not effect your total revenue and you will garner goodwill, thereby gaining a larger market share.
Income elasticity of demand (define)
describes the percentage change in quanity demanded due to a percentage change in consumer income.
Income elasticity of demand (formula)
% change of quantity demanded/% change of income.
The price elasticity of demand is always negative because of _______
the Law of Demand
The Law of Demand (define)
assuming all else besides price is constant (ceteris paribus0 more goods will be purchased at lower prices or fewer goods will be purchased at higher prices. When the price goes down we buy more, when it goes up we buy less.
The Income Elasticity of Demand can be ______ or ______ depending on the the type of product (good).
positive or negative.
The Income elasticity of demand is _____ for a normal good and _______ for an inferior good if income increase.
The Income elasticity of demand is _____ for a normal good and _______ for an inferior good if income decreases.
The Income Elasticity of Demand has a(n) ______ relationship with normal goods and a(n) _______ relationship with inferior goods.
Cross Elasticity of Demand (define)
change of quantity demand of Good A due to a change of price for Good B.
Cross Elasticity of Demand (formula, when goods to compare are A and B
% change of Quantity Demanded of A/% change of Price of B
If Cross Elasticity of Demand is positive, then goods compared are _______
When Cross Elasticity of Demand is negative, then the goods being compared are _____
When the increase in Price of good A causes an increase in the Quantity Demanded of Good B, the goods are ______
substitutes (or replace each other)
When the increase in Price of good A increases and decreases the Quantity Demanded of Good B, the goods are ______
complements (or are consumed together)
substitute goods (define)
replace each other
complement goods (define)
are consumed together
Elasticity of Supply
how a change in supply causes movement along a demand curve (or a change in Quanityt demanded).
Movement along a demand curve (aka)
Quantity Demanded
Elasticity of Supply (formula)
Es=% change of Quanity Supplied/% change of Price
Elasticity of Supply is always ______ decause of the Law of ______
Law of Supply - find definition
If Elasticity of Supply is zero is is
perfectly inelastic
If the Elasticity of Supply = 1
it is Unitary elastic
Elasticity of Supply > 1
Supply is relatively elastic
Elasticity of Supply = infinity
Supply is perfectly elastic
Perfectly inelastic (define)
Perfectly elastic (define)
Unit Elastic (define)
Inelastic (define)
Elastic (define)
1% increase in price will lead to more than 1% decrease in Quantity Demanded
Increase in Price = Decrease in Total Revenue
Decrease in Price = Increase in Total Revenue
Two things that effect Elasticity of Supply are _______ and _______
technology used to produce the good and length of time during which the price change is in place.
The longer the amount of time available the ______ elastic the Elasticity of Supply is for a good or service.
Demand is perfectly elastic (define)
price elasticity = infinity, demand curve is horizontal at the market price, any change in supply only impacts quanity sold in equilibrium, equilibrium price does not change.
Price elasticity of Demand = 0 (describe)
perfectly inelastic, demand curve is verticle, quantity demanded does not change with price, change in supply changes price and there is no change in quantity sold.
Perfectly Elastic Supply Curve(describe)
perfectly horizontal at market price, changes in demand are only reflected in changes in quanity sold, price does not change.
Perfectly Inelastic Supply Curbve (describe)
Supply Curve is verticle, quantity supplied is the same regardless of price, only change in demand (Quantity Demanded) influence market-clearing price.
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