Lecture 3 Flashcards
(29 cards)
What is elasticity in economics?
A measure of how much the quantity demanded or supplied responds to changes in price or other factors.
Define income elasticity of demand.
IϵD = percentage change in quantity demanded / percentage change in income.
What does a positive income elasticity of demand indicate?
It indicates that the good is a normal good.
What type of goods have an income elasticity of demand greater than 1?
Luxury goods.
What is the classification of goods with IϵD ≤ 0?
Inferior goods.
What does cross-price elasticity of demand measure?
The responsiveness of demand to changes in the price of another good.
If ϵDAB > 0, what type of good is good B?
Substitute good.
If ϵDAB < 0, what type of good is good B?
Complementary good.
What does neoclassical consumer theory explain?
The downward sloping demand curve based on individual choices.
What is methodological individualism?
The explanation of social phenomena in terms of self-interested individuals.
What is total utility?
A measure of total satisfaction from consuming a good within a specific time period.
Define marginal utility.
The additional satisfaction gained from consuming one extra unit of a good.
What is diminishing marginal utility?
The decrease in additional satisfaction from consuming extra units of a good.
How is marginal utility calculated?
As the slope of the total utility curve.
What does a rational consumer aim to maximize?
Consumer surplus (CS = TU - TE).
What does an indifference curve represent?
All combinations of two goods that provide the same level of satisfaction.
What is the marginal rate of substitution (MRS)?
The rate at which a consumer is willing to exchange one good for another while maintaining the same level of satisfaction.
What are the three properties of preferences in indifference analysis?
- Completeness
- Transitivity
- Consistency
What does the budget line show?
All combinations of goods that can be purchased at given prices and a given budget.
What effect does an increase in income have on the budget line?
Shifts the budget line to the right.
What is the price effect on the budget line?
A decrease in the price of a good pivots the budget line to the right.
What is the optimal consumption point for a rational consumer?
The highest indifference curve that is tangential to the budget line.
What does the income-consumption curve show?
How a person’s consumption bundle changes due to changes in income.
What does the price-consumption curve illustrate?
How a person’s consumption bundle changes due to changes in the price of one good.
