Flashcards in Second Midterm - Class Notes Deck (14)
Cross Price Elasticity
Measures the responsiveness of demand of good A to a change in the price of good B
ηab = % change in Q of good A / % change in P of good B
IF ηab > 0, then good A and B are SUBSTITUTES
Elasticity of Supply
Measures the responsiveness of quantity supplied to a change in price
ηs = % change in Q supplied / % change in PRICE
ηs > 1 supply is ELASTIC
Application : Product Specific Tax
Imposition of a sales tax suppose the government places a per unit tax upon some commodity
1) What impact does the tax have upon the equilibrium price and quantity?
2) Who pays the tax?
LOOK AT GRAPH EXAMPLE IN BOOK
The Theory of Consumer Behaviour
Theory underlying the demand curve
ASSUMPTIONS ON PREFERNCES
1) COMPLETENESS (Pick one)
When facing a choice between any two bundles of goods, a consumer can rank them so that one and only one of the following relationships is true: The consumer prefers the firs bundle to the second, prefers the second to the first, or is indifferent between them.
If consumer prefers bundle X to bundle Y, and prefers bundle Y to bundle Z, then the consumer bust prefer bundle X to bundle Z
Ceteris paribus, more of a commodity is preferred than less of it.
The satisfaction, happiness or need fulfillment that consumers receive from the goods and services they consume
The change in utility that results from an incremental change in consumption of a good or service
The Law of Diminishing Marginal Utility
(The more you have something, the less happiness next time)
The greater is the amount consumer of a good or service, the smaller the increase in utility from an incremental increase in the consumption of that good.
Or, the MORE consumed of a good, the smaller is the marginal utility.
The less of the good consumed, the GREATER the marginal utility.
The Consumer Objective
Is to maximize his utility given his level of income
The consumer equilibrium is defined as those levels of the quantities such that the consumers utility is maximized.
A consumer equal is achieved when the consumer has NO INCENTIVE to reallocate his budget or to buy a different bundle of goods.
What are the two conditions that consumer equilibrium must satisfy
1) THE CONSUMER MUST SPEND ALL OF HIS INCOME
In our model, there is no saving and borrowing. We can include savings and borrowing into our model but that requires that we introduce time and present value calculations.
2) MU1 / P1 = MU2 / P2 = ... = MUn / Pn
(Equimarginal in consumption)
Where MU1 / P1 is the extra satisfaction from an additional dollar spent on good 1
And MU2 / P2 is the extra satisfaction from an additional dollar spent on good 2.
Consumer equilibrium must be equal, if not, it isn't.
Deriving the market demand from individual demand curves is relatively easy for private goods, simply horizontally sum the individual demands
That is, SUM AT EACH PRICE, the quantities demanded at the price.
Price = 1, Ind A=5, Ind B=3, Ind C=4, MARKET = 12
Goods that are rival and exclusive
A good is RIVAL if one persons consumption significantly decreases another persons consumption
A good is EXCLUSIVE if someone can be prevented from consuming it
The Demand Curve Shows us Two Things
1) Shows what quantity consumers are willing to buy at a given price
2) Shows what consumers are WILLING TO PAY for a given quantity (for the last unit)