Exam 1

Question 1

Price elasticity of demand

Answer 1

the percentage change in quantity demanded resulting from a 1 percent change in price.

Question 2

Price elastic

Answer 2

if the elasticity of demand exceeds 1, Luxury goods

Question 3

price inelastic

Answer 3

if the elasticity of demand is less than 1, necessity goods

Question 4

unitary elasticity

Answer 4

if the elasticity of demand is equal to 1

Question 5

price elasticity of supply

Answer 5

the percentage change in quantity supplied resulting from a 1 percent change in price

Question 6

Price/market economic system

Answer 6

normative model 1) free play of market forces (supply and demand)

2) Complete private ownership of productive resources
3) Price/ARBITER in the market
4) Absence of Government intervention

Question 7

Mixed economic system

Answer 7

1) Predominance of market forces (government intervention if needed; demand and supply forces are dominant)
2) Private Ownership
3) Price: dominant element (regulated)
4) Limited government intervention(as warranted/dictated by historical needs)

Question 8

Command/Centralized economic system

Answer 8

1) Complete control of market forces (central planning entity has the command over everything)
2) Public ownership (state ownership)
3) Prices are fixed by the planners

Question 9

Law of Demand

Answer 9

Given certain things unchanged or constant, an increase in the price of a good will lead to a decrease in the quantity demanded and vice versa

Question 10

cross elasticity of demand

Answer 10

elasticity = percentage change in the quantity demanded of another good (Y) / Percentage change in the Price of one good (x)

Question 11

Point elasticity of demand

Answer 11

1) entails an infinitely small change in the price of a good leading to a related infinitely small change in the quantity demanded.
2) Applicable to a linear or non-linear demand function
Formula: (change in quantity / change in price) * (Price / Quantity)

Question 12

Income elasticity of demand equation

Answer 12

= % change in quantity demanded / % change in income

Question 13

income elasticity of demand classifications

Answer 13

Positive income elasticity = Normal good: a good which is consumed more of as a sequel to an increase in income
Negative income elasticity = Inferior good: a good which is consumed less of as a sequel to increase income.

Question 14

Engel Curve

Answer 14

Traces the relationship between the level of income and the quantity demanded of a good

Question 15

Theory of Consumer Behavior

Answer 15

1) Consumer is given to rational behavior
2) consumer wants to maximize the total benefits out of the expenditure he/she makes toward the acquisition of a bundle of goods(subjective) ‘Max benefit’
3) Given an amount of benefit, consumer aim at minimizing the cost of the benefit derived. ‘ Mini Cost’
4) Min-max solution

Question 16

Budget line

Answer 16

encompasses limitations / constraints on toe consumer via the available disposable income (I) and the respective prices one would have to pay for the goods in the consumer basket (for x and y) (prices: Px, Py)
slope is Px / Py

Question 17

Mini-max on IC

Answer 17

Consumer being able to be on the highest IC (max benefit) given the budget constraint (minimum cost)

Question 18

Marginal rate of substitution

Answer 18

MRS, the ratio (change in Y) / (change in x) expresses the MRS signaling the number of units of (x or y) needed to be given up (traded) to acquire one more of unit of x

Question 19

Equal Equations

Answer 19

(Slope of IC) Change in Y / Change in X = MUx / MUy = Px / Py (Slope of BL)