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Marginal Utility
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Additional utility gained from consuming one more unit of a good.
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Ratio of MU to TU
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Marginal Utility=Derivative of the Total Utility
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Total Utility Equation
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Add together the marginal utility values of each of the units gained/consumed.
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Consumer Surplus
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Value received from the purchase of a good in excess of what is paid for it.
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Producer Surplus
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Difference between the price a seller receives for a good and the minimum price that they're willing to supply a quantity of the good.
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Elasticity
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How responsive something is to various changes.
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Price Elasticity of Demand
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There is a relationship between quantity demanded and the price.
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Things that change the Price Elasticity of Demand
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- Number of Close Substitutes (One price goes up, substitute is used)
- Proportion of Income Spent on Good (More expensive, more likely to do your research)
- time. (More=able to find substitutes)
-Lack of Importance (Less essential=Less Demand)
- Proportion of Income Spent on Good (More expensive, more likely to do your research)
- time. (More=able to find substitutes)
-Lack of Importance (Less essential=Less Demand)
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Luxury Items
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Goods with elastic demand.
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Necessities
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Goods with inelastic demand.
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Unit Elastic
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Percent of demand changes along with the price.
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Formula for Price Elasticity
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%ChangeQD/%Changeprice
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Relationship between elasticity and total revenue.
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Inverse relationship between elasticity and total revenue.
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Relationship between inelasticity and TR.
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Direct relationship between inelastic and TR.
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Elasticity of Supply
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Measures responsiveness of the quantity supplied and the price change.
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Formula for Elasticity of Supply
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Percent Change in Quantity Supplied/Percent Change in Price
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Income Elasticity of Demand
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Responsiveness of the Quantity Demanded to Changes in Income.
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Normal Goods
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Goods bought more often when income is higher.
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Inferior Goods
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Goods bought less when income increases and more on a lower budget.
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Formula for Income Elasticity of Demand
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Percent Change in QD/Percent Change in Income
IF POSITIVE, GOOD IS NORMAL
IF NEGATIVE, GOOD IS INFERIOR
IF POSITIVE, GOOD IS NORMAL
IF NEGATIVE, GOOD IS INFERIOR
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Cross Price Elasticity of Demand
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Measures responsiveness of the quantity demanded to the price of another good.
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Complements
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Items that are typically consumed at the same time, inverse relationship between their prices.
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Substitutes
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Items that can be used instead of another one. Direct relationship between price of good and price of another good.
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Cross-Price Elasticity of Demand Formula
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Percent Change QD Good X/Percent Change in Price of Good Y
IF POSITIVE, ITEMS ARE SUBSTITUTES
IF NEGATIVE, ITEMS ARE COMPLEMENTS
IF POSITIVE, ITEMS ARE SUBSTITUTES
IF NEGATIVE, ITEMS ARE COMPLEMENTS
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Deadweight Loss
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The amount that a consumer loses and a producer gains when the change in price of something occurs.
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