Individual and market demand

Question 1

Price-consumption curve (PCC)

Answer 1

Holding income and the price of Y constant, the PCC for a good X is the set of optimal bundles traced on an indifference map as the price of X varies

Question 2

Moving from the PCC to the individual’s demand curve

Answer 2

Table and then plot the different price-quantity combinations from the PPC

Question 3

Income-consumption curve (ICC)

Answer 3

Holding the prices of X and Y constant, the ICC for a good X is the set of optimal bundles traced on an indifference map as income varies

Question 4

Engel curve

Answer 4

• A curve that plots the relationship between the quantity of X consumed and income
• Plots the quantities of X on the ICC against the corresponding values of income
• Can be backward bending when changing from a normal good to an inferior good as income rises

Question 5

Normal good

Answer 5

A good whose quantity demanded rises as income rises (positive sloping Engel-curve)

Question 6

Inferior good

Answer 6

A good whose quantity demanded falls as income rises (negative sloping Engel curve)

Question 7

Substitution effect

Answer 7

That component of the total effect of a price change that results from the associated change in the relative attractiveness of other goods

Question 8

Income effect

Answer 8

The component of the total effect of a price change that results from the associated change in the real purchasing power

Question 9

Graphs p 99

Answer 9

Graphs p 99

Question 10

Giffen good

Answer 10

• A good whose quantity demanded rises as its price rises
• Inferior good whose income effect is stronger than its substitution effect
• Has to account for a large part of the consumers’ budget
• Has to have a relatively small substitution effects

Question 11

Price insensitive good

Answer 11

• Eg salt
• No close substitutes (represented by indifference curves with a nearly right-angled shape)
• Negligible budget share (intersect between indifference curves and budget line near Y-intersect of budget line

Question 12

Income and substitution effects of a price sensitive good

Answer 12

• Eg housing
• Close substitutes available (Smooth convex shaped indifference curve)
• Large budget share

Question 13

Aggregation of individual demand curves

Answer 13

Horizontal summation to get the market demand

Question 14

Price elasticity of demand

Answer 14

The percentage change in the quantity of a good demanded that results from a 1 percent change in its price

Question 15

Elasticity of demand formula

Answer 15

E = dQ/Q / dP/P

E = dQ/dP * P/Q

E = P/Q * 1/slope

Question 16

Elastic demand

Answer 16

E > 1

Question 17

Inelastic demand

Answer 17

0 < E < 1

Question 18

Unit elastic demand

Answer 18

E = 1

Question 19

Perfect elastic demand

Answer 19

E = infinity

Question 20

Perfect inelastic demand

Answer 20

E = 0

Question 21

How to increase total revenue

Answer 21

Elastic demand - decrease prise

Inelastic demand - increase price

Unit Elastic demand - keep price the same

Question 22

Elasticity and tax income

Answer 22

• It make more sense to levy a tax on a product with an inelastic demand because
• the consumers pay the burden of the tax more
• the government collects more tax income
• the deadweight loss is smaller

Question 23

Determinants of price elasticity of demand

Answer 23

• Availability of substitutes (substitute effect is smaller if less substitutes are available)
• Budget share (Income effect is bigger if the good forms a bigger part of the budget)
• Direction of income-effect (normal or inferior good)
• Time (eg fuel price inelastic over short term and more elastic over long term as driver switch to other modes of transport)

Question 24

Constant elasticity demand curve

Answer 24

P = k / Q^(1/E)

Question 25

Segment ratio method

Answer 25

abs(Ec) = EC/AC

Question 26

Income elasticity of demand

Answer 26

The percentage change in the quantity of a good demanded that results from a 1 percent change in income

Question 27

Income elasticity of demand formula

Answer 27

n = dQ/Q / dY/Y n = dQ/dY * Y/Q n = P/Q * 1/slope of Engel curve

Question 28

Luxury good

Answer 28

n > 1

Question 29

Necessity

Answer 29

0 < n < 1

Question 30

Inferior good (income elasticity)

Answer 30

n < 0

Question 31

Cross price elasticity of demand

Answer 31

The percentage change in the quantity of one good demanded that results from a 1 percent change in the price of the other good

Question 32

Cross price elasticity of demand formula

Answer 32

Exz = dQx/Qx / dPz/Pz Positive = substitutes Negative = compliments

Question 33

Slide 38 & 39

Answer 33

Look at

Question 34

Bandwagon effect

Answer 34

The desire to have a good because almost everybody else has it Makes the demand curve more elastic

Question 35

Snob effect

Answer 35

The desire to have a good because not a lot of people own it Makes the demand curve less elastic

Question 36

Intertemporal consumption bundles

Answer 36

Consumers choose between their current and future consumption Max future consumption = M1(1+r) + M2 (y-intersect) Max current consumption = M1 + PV(M2) (X-intersect) Slope = -(1+r)

Question 37

Marginal rate of time preference (MRTP)

Answer 37

The number of units of consumption in the future a consumer would exchange for 1 unit of consumption in the present Slope of the intertemporal indifference curves MRTP = dFuture/dCurrent

Question 38

Positive time preference

Answer 38

MRTP > 1

Question 39

Negative time preference

Answer 39

MRTP < 1

Question 40

Neutral time preference

Answer 40

MRTP = 1

Question 41

Patient and impatient consumer

Answer 41

Patience - postpone consumption Impatience - Consume much now

Question 42

Network externality

Answer 42

A network externality exists when a person's demand for a specific good does not only depend on their own demand for that good, but also on their perception of how many other people own that good