Ch 8. Demand and Supply Analysis

Q: factors of elasticity

availability of substitutes : High Substitutes = High Elasticity ie types of t shirts proportion of income: higher proportion of income = higher elasticity ie toothpaste vs gym membership change over time: Time goes on = higher elasticity ie electric cars

Q: cross-price elasticity of demand

a good that consumers demand more of when their incomes increase Housing, nicer car, ect

Q: income elasticity of demand

a good that consumers demand less of when their incomes increase ex. bus travel, or rice

Q: normal good

when consumers react to an increase in a good's price by consuming less of that good and more of other goods.

Q: inferior good

when the price of the good falls the consumer buys more bc they have more purchasing power

Q: substitution effect

Giffen: an inferior good for which negative income effect outweighs positive subs effects when price falls, this is a theoretical good. consumption decreases when $P decreases Veblen: higher price makes good more desirable, more utility obtained from being able to consume at higher $P (e.g. Gucci bag)

question

Price Elasticity of Demand

answer

How responsive is the demand of a good to a change in the price

question

elastic demand

answer

When % change in Price leads to a greater % change in demand

question

inelastic demand

answer

When % change in Price leads to a smaller % change in demand

question

perfect elasticity

answer

horizontal line

question

perfectly inelastic

answer

vertical line

question

factors of elasticity

answer

availability of substitutes:

High Substitutes = High Elasticity

ie types of t shirts

proportion of income:

higher proportion of income = higher elasticity

ie toothpaste vs gym membership

change over time:

Time goes on = higher elasticity ie electric cars

question

Elasticity Straight Line Demand Curve

answer

partialQ/partialP * P/Q

question

elasticity at a point

answer

slope coefficient

question

change in quantity/change in price

answer

the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good

cross price el > 0 then goods are substitutes

cross price el < 0 then goods are complements

question

cross-price elasticity of demand

answer

a good that consumers demand more of when their incomes increase

Housing, nicer car, ect

question

income elasticity of demand

answer

a good that consumers demand less of when their incomes increase

ex. bus travel, or rice

question

normal good

answer

when consumers react to an increase in a good's price by consuming less of that good and more of other goods.

question

inferior good

answer

when the price of the good falls the consumer buys more bc they have more purchasing power

question

substitution effect

answer

Giffen: an inferior good for which negative income effect outweighs positive subs effects when price falls, this is a theoretical good. consumption decreases when $P decreases

Veblen: higher price makes good more desirable, more utility obtained from being able to consume at higher $P (e.g. Gucci bag)

question

income effect

answer

increasing at a decreasing rate.

question

Giffen Good vs Veblen Good

answer

more of a resource is devoted to production, holding the quantity of other inputs constant, the output will increase, but at a decreasing rate.

question

diminishing marginal returns

answer

- In the short run, fixed costs are incurred regardless of production.

- If price level below AVC then variable costs are not covered [MC<AVC, TR<TVC]=> shutdown

- If price level below ATC but above AVC, then variable costs are covered, but fixed costs are not [AVR<MC<ATC, TVC<TR<TC] => business can operate in the short run in a loss situation

- When MR = ATC then breakeven has occurred

question

law of diminishing returns

answer

The total opportunity costs of all factors of production

question

Breakeven and Shutdown

answer

TR - total economic cost

question

economic cost

answer

Price x Quantity

question

economic profit

answer

the cost we pay when we give up something to get something else

question

total revenue

answer

When MC = MR

question

oppourtunity cost

answer

quantity where TR = TC, price = ATC

question

maximum economic profit

answer

are any decreases in the long-run average costs that come about when a firm alters all of its factors of production in order to increase its scale of output.

question

breakeven point

answer

undefined

question

Economies and Diseconomies of Scale

answer

undefined

1 of 26

question

Price Elasticity of Demand

answer

How responsive is the demand of a good to a change in the price

question

elastic demand

answer

When % change in Price leads to a greater % change in demand

question

inelastic demand

answer

When % change in Price leads to a smaller % change in demand

question

perfect elasticity

answer

horizontal line

question

perfectly inelastic

answer

vertical line

question

factors of elasticity

answer

availability of substitutes:

High Substitutes = High Elasticity

ie types of t shirts

proportion of income:

higher proportion of income = higher elasticity

ie toothpaste vs gym membership

change over time:

Time goes on = higher elasticity ie electric cars

question

Elasticity Straight Line Demand Curve

answer

partialQ/partialP * P/Q

question

elasticity at a point

answer

slope coefficient

question

change in quantity/change in price

answer

the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good

cross price el > 0 then goods are substitutes

cross price el < 0 then goods are complements

question

cross-price elasticity of demand

answer

a good that consumers demand more of when their incomes increase

Housing, nicer car, ect

question

income elasticity of demand

answer

a good that consumers demand less of when their incomes increase

ex. bus travel, or rice

question

normal good

answer

when consumers react to an increase in a good's price by consuming less of that good and more of other goods.

question

inferior good

answer

when the price of the good falls the consumer buys more bc they have more purchasing power

question

substitution effect

answer

question

income effect

answer

increasing at a decreasing rate.

question

Giffen Good vs Veblen Good

answer

more of a resource is devoted to production, holding the quantity of other inputs constant, the output will increase, but at a decreasing rate.

question

diminishing marginal returns

answer

- In the short run, fixed costs are incurred regardless of production.

- If price level below AVC then variable costs are not covered [MC<AVC, TR<TVC]=> shutdown

- If price level below ATC but above AVC, then variable costs are covered, but fixed costs are not [AVR<MC<ATC, TVC<TR<TC] => business can operate in the short run in a loss situation

- When MR = ATC then breakeven has occurred

question

law of diminishing returns

answer

The total opportunity costs of all factors of production

question

Breakeven and Shutdown

answer

TR - total economic cost

question

economic cost

answer

Price x Quantity

question

economic profit

answer

the cost we pay when we give up something to get something else

question

total revenue

answer

When MC = MR

question

oppourtunity cost

answer

quantity where TR = TC, price = ATC

question

maximum economic profit

answer

are any decreases in the long-run average costs that come about when a firm alters all of its factors of production in order to increase its scale of output.

question

breakeven point

answer

undefined

question

Economies and Diseconomies of Scale

answer

undefined

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