Exam 1 Equations

Question 1

The slope of the D/S curve

Answer 1

% Change P / % Change Q

Question 2

Equilibrium

What is a comparative statistic?

Answer 2

P = Q

Comparison between PQ before an exogenous shock and the new PQ after the shock

Question 3

What is an exogenous shock?

Answer 3

Changes to the non-price determinant of a supply or demand function

• changes in incomes, related goods, or anything that does not directly impact the product price

Question 4

What happens to P* and Q* when an exogenous shock affects the supply function?

dP/da impact on dS/da

Answer 4

(dP/da) and (dS/da) hold an inverse relationship. An exogenous shock “a” on the supply side will shift the supply curve up (increasing P* and decreasing Q) or shift the curve down (decreasing P and increasing Q*)

Question 5

What relationship does an exogenous variable “a” hold with supply “S”?

Remember - exogenous variables “a” impact non-price determinants of supply

Answer 5

Exogenous variables ‘a’ and supply ‘S’ hold a normal relationship.

When a non-price determinant increases/decreases, the supply of a good will also increase/decrease

Question 6

What is an endogenous variable

Answer 6

Are price determinant variables

• any direct input cost to a good is an endogenous variable (capital, labor cost, raw material cost, technology cost, and anything else directly related to the output good)

Question 7

What is a substitute good and explain their impacts as exogenous variables

Answer 7

If a consumer can replace the consumption of good A with good B, then it is considered a substitute good

Any changes in price determinants of good A will have an inverse shift of the demand curve for good B

Question 8

When comparing cross-price elasticity what are the values for substitute goods, complimentary goods, and non-related goods

Answer 8

Ea,b > 0 = substitutes

Ea,b < 0 = compliments

Ea,b = 0 = non-related