question
What is a demand function?
answer
It gives the optimal amount of goods as a function of prices and income faced by the consumer
question
What form is the demand function written in?
answer
x1=x1(p1,p2,m)
question
A normal good is a good that has the following characteristics
answer
The quantity demanded rises/lowers if income rises/lowers
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How do you know if a good is a normal good?
answer
dx1/dm>0
question
An inferior good is a good that has the following characteristics
answer
an increase in income leads to a decrease in the quantity demanded
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How do you know if a good is an inferior good?
answer
2x1/dm<0
question
Income offer curve of the income expansion path is a curve that depicts
answer
the demanded bundles
question
From the income curve what type of curve do we generate?
answer
Engel curve
question
The engel curve is a graph of
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prices that are fixed and how demand changes as income changes
question
What property do homothetic preferences have?
answer
consumer preferences that only depend on the ratio of good 1 to good 2 (x1,x2) to (y1,y2) = (2x1,2x2) to (2y1,2y2)
question
What property does a giffen good have?
answer
a price decrease in good 1 leads to a decrease in consumption of good 1, it is extremely inferior
question
A price offer curve is a curve
answer
that connects optimal points as the budget line pivots due to price change
question
From the price offer curve we can derive ____________ function.
answer
Demand
question
A substitute is a good which the demad
answer
for the good goes up when the price of other good goes up
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A substitute satisfies the following condition
answer
dx1/dp2>0
question
A compliment is a good in which the demand
answer
decreases as the price increases
question
A compliment satisfies the following condition
answer
dx1/dp2<0
question
What is the slutsky equation?
answer
when the price of 1 good changes there are two effects.... substitution and income
question
What is the part of the slutsky equation that captures the substitution effect?
answer
dx1/dp2
question
The substitution effect of the slutsky equation is always
answer
negative
question
What is the part of the slutsky equation that captures the income effect?
answer
dx1/dm
question
The income effect can be positive or negative, it depends on if the good is what?
answer
inferior or normal
question
If the good is normal then dx1/dm is what then 0
answer
greater than
question
If the good is inferior then dx1/dm is what than 0
answer
less than
question
The substitution effect is the change in demand due to
answer
a change in relative prices while holding income constant
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The income effect is the change in demand due to
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having more purchasing power
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What does consumer surplus measure?
answer
how much the consumer would need to be paid to give up the good
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What does compensating variable measure?
answer
the amount of income needed to restore a consumer to his original indifference curve?
question
What does the equivalent variable measure?
answer
the amount of money needed to be taken away before the price change to leave him as well off as he was before the price change
question
What does elasticity measure?
answer
how responsive something is to change
question
What is the price elasticity of demand defined as?
answer
the percent of change in quantity divided by the percent change in price
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What is the equation for price elasticity of demand?
answer
p/q * dp/dp
question
What is income elasticity of demand defined as?
answer
how the quantity demanded responds to a change in income
question
What is the equation for income elasticity of demand?
answer
m/q * dq/dm
question
What are the conditions for elastic demand?
answer
a change in the price has a big effect on the quantity demanded
question
What are the conditions of inelastic demand?
answer
a change in price has a small change in quantity demanded
question
What are the conditions for unit elastic demand?
answer
a change in price will have a proportion change in the quantity demanded
question
What is the equation for elastic?
answer
!Ep!>1
question
What is the equation for inelastic?
answer
!Ep!<1
question
What is the equation for unit elastic?
answer
!Ep!=1
question
How do you find the vertical intercept?
answer
It is b in the equation
question
How do you find the horizontal intercept?
answer
make p 0 and then solve
question
What shape does gross consumer surplus make?
answer
A triangle on top of a rectangle
question
What shape does net consumer surplus make?
answer
A triangle
question
What equation do you use to solve CV?
answer
Old(m/2p1)(m/2p2)=new utility
question
What equation do you use to solve EV?
answer
New(m/2p1)(m/2p2)=old utility
question
What does the substitution effect do to the budget line?
answer
It pivots it
question
What does the income effect do to the budget line?
answer
it shifts it
question
What is the aggregate demand for good 1?
answer
The sum of individual demands over all consumers
question
How do you find the inverse demand?
answer
Solve for p
question
How do you find the market demand?
answer
solve for q
question
What is the intensive margin?
answer
Refers to how much per unit
question
What is the extensive margin?
answer
Refers to how many units
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