# Shared Flashcard Set

## Details

Econ Ch 3
Chapter 3
64
Economics
04/12/2012

Term
 Measure of Inflation
Definition
 Percent change in the cost of the same good in the following year
Term
 Consumer Price Index
Definition
 Index of the cost of purchasing certain bundles of goods.    Set at 100 (So 106.5 = Inflation rate of 6.5)
Term
 Absolute VS Relative Prices
Definition
 Absolute Price Changes: Change in the whole economy's general price level   Relative Price Change: Differing increases / decreases in the prices of two differenct goods
Term
 How to determine the price a good would be in a future year from a past year
Definition
 CPI of Future Year DIVIDED BY CPI of Past Year   = X   X MUPTIPLIED BY Past price = adjusted current price
Term
 The law of demand placed a qualitative restriction on the demand slope but does not place a quantitative restriction on the demand slope.  Explain.
Definition
 Qualitative: Demand slop is negative   Quantitative: Law does not say to what degree slope is negative (steepness)
Term
 Slope Formula for Demand Equation Price       Quantity 4            5 10          1
Definition
 y1 - y2 x1 - x2 10 - 4   =  6   =  -2   1-5        -3  (Lower quantity on bottom, higher quantity on top) Remember, slope is always NEGATIVE for demand
Term
 Change in quantity of demand vs Change in demand
Definition
 Change in quantity of demand: Movement ALONG the demand curve   Change in demand: Demand curve shifts to the right (incr) or left (decr)
Term
 Quantity Supplied
Definition
 The amount of a good a producer supplies at a given price
Term
 Market Demand
Definition
 Lateral sum of individual demand curves   Shows total amount demanded by ALL consumers at a given price
Term
 Why do people buy less of a good as price increases?
Definition
 1. They switch to a substitute  w/ lower cost   2. They simply cannot afford it
Term
 Demand Equation
Definition
 P = a + bQd   P = price a = intercept (At this price, Q=0) b = slope (always negative in demand curve) Qd = quantity demanded.
Term
 You are given two points on a demand curve (1, 10) and (3, 6)   Use demand formula to determine quantity demanded when P = \$4
Definition
 (3, 6) and (1, 10) means: (Q1, P1) (Q2, P2) P    Q 6    3 10  1 Slope (B) 10 - 6   =  4   =  -2   1-3     -2  Intercept(A)  10=a-2(1)   =   12 Solve for when P=4 P = a +bQd 4 = 12 -2(Qd)     4  = 12 -2         Qd = 12 - 2 (4)     Qd =  4                       Qd
Term
 Intercept Formula for Demand Equation
Definition
 Use one of the given points used to find slope   Input P and Qd   Solv
Term
 Intercept Formula for Demand Equatation Suppose P = 10, B = -4,
Definition
 After finding slope...         P=a+bQd   Use one of the points you used to find slope and plug in P and Qd
Term
 Change in quantity of supply vs Change in supply
Definition
 Change in quantity of supply: Movement ALONG the supply curve   Change in supply: Supply curve shifts to the right (incr) or left (decr)
Term
 Competetive Market
Definition
 Where one producers and buyers exchange at different market prices, which cannot be determined by one individual prod/cons alone
Term
 Jane has choice of two jobs. She values variety at \$400.   Job #1: Pays \$1000 a week, w/o variety Job #2: Pays \$800 a week, with variety   Which job will she choose?
Definition
 Job #1:  \$1000 benefit \$400 opp cost (of variety forgone) Job # 2: \$800 benefit \$400 benefit (of utility) She will choose job #2 b/c it has a higher total value to her
Term
 Explan how does an increase in income can have two different effects of demand based on the kind of good demanded.
Definition
 Normal good: When income increases, demand increases.  When income decreases, demand decreases.         (most goods) Inferior good When income increases, demand decreases.  When income decreases, demand increases.         (Goods purchased b/c of income restraints,          like ramen)
Term
 How do the affects of "increase in price of a substitute" and "Expectation of higher prices in future" relate?
Definition
 Buying a good today    is a SUBSTITUTE for   Buying a good tomorrow
Term
 Law of Supply
Definition
 If the price of a good increases, the quantity supplied increase, all things remaining the same.
Term
 Suply Schedule
Definition
 Lists quantity supplied at different prices
Term
 Year A --> Year B    If CPI rises 10% and income rises 10%   What is the expected outcome?
Definition
 No constraints have changes, so we would expect no change in behavior
Term
 Year A --> Year B If CPI increases 10% and The price of a good A increases 6% What happens to the real/relative price of good A?
Definition
 The real price decreases by 6%
Term
 Explain how money is a good What is the price of money? If a pizza is \$5, what is the price of money for that good
Definition
 Money is a good b/c it is useful. It lowers the cost of transacting   Price of money: amount of other goods consumer is willing to give up in order to retain 1 unit of currency (\$1)   If a pizza is \$5, price of money is 1/5 pizza
Term
 Explain inflation in terms of the marginal value of money
Definition
 When a government prints more money in greater amounts than goods available the consequence is a decreased marginal value of money,  and equivalenty, increase in prices of all goods.
Term
 What is the cost of holding onto wealth from year A --> year B
Definition
 The percent of inflation from year A --> year B
Term
 Inflation rate from year A --> year B is 10% what is the cost of holding onto \$100 of wealth from year A --> year B
Definition
 Cost is \$10   With \$100, you will only be able to purchase \$90 worth of goods next year
Term
 As inflation increases, cash holdings decrease   (b/c of increased cost of inflation on stored money) What does this postulate, then, infer about the velocity of money
Definition
 The velocity of money, or the # of transactions   a given amount of money will support   will INCREASE
Term
 Define Elasticity and Elastic vs Inelastic vs Unit Elastic
Definition
 Elasticity: Responsiveness of quantity demanded/supplied as price changes Elastic: When % change in quantity is GREATER than % change in price  Inelastic: When % change in quantity is LESS than % change in price. Unit Elastic
Term
 Elasticity Equation
Definition
 E = P  x      1          Q     |slope|
Term
 How to calculate slope for elasticity equation
Definition
 (Point A is higher on demand curve than point B) Slope =  Qb – Qa                   Pb - Pa
Term
 How are alternative goods and elasticity related?
Definition
 The more alternative goods, the more elastic   The less alternative goods, the more inelastic
Term
 What is perfectly elastic? When does this hapen?
Definition
 Perfectly elastic: Demand curve is horizontal. If price is one unit more, no one will buy. If price is one unit less, supply will run out   This happens w/ price takers, who have no influence on price      Ex: Small company w/in large market           Indv consumer w/in large market
Term
 What is perfect inelasticity?
Definition
 Demand curve is vertical   With any price change, quantity remains the same
Term
 Why are higher-quality goods usually shipped farther away than lower-quality goods? (assume goods are substituts) Suppose you ship both a high quality good and a low quality good far away. What happens to the price of the high quality good?  Qd for high quality good? Overall demand?
Definition
 The cost of transportation is relatively less for a higher-valued good than a lower-valued good   The same transportation costs applied to both goods, so increasing cost of both goods by same amount decreases difference in prices, so people buy more high-quality goods   Overall demand decreases because overall prices increase
Term
 At home, good steak costs \$4, so-so steak costs \$2   At a resturaunt, good steak costs \$24                        so-so steak costs \$20 Where will relatively more good steak be consumed?
Definition
 At home: 2:1 Cost of good steak is value of TWO so-so steaks At resturaunt: 12:11 Cost of good steak is FRACTION of a so-so steak   More good steaks will be consumed at the resturaunt
Term
 Why demand curve is downward sloping
Definition
 As price increases... 1. People switch to substitutes 2. People can't afford good
Term
 Compliment Goods vs Subsitute Goods and affects of price incr/decr of other good's D or Qd
Definition
 Compliment Goods: Decr P of good A = Incr Qd of good A                        = Incr demand of good B Substitute Goods: Incr P of good A = Decr Qd of good A                        = Incr demand of good A
Term
Definition
Term
 As price rises, supply increases for two reasons
Definition
 1. Production more costly 2. New sellers enter market at their min price
Term
 Law of One Price
Definition
 A single price at all transactions of a good   Why? This maximizes mutual benefits from trade
Term
 Arbitrage
Definition
 One seller selling good at lower price than all the others
Term
 Factors That Cause Increase in Supply
Definition
 Decrease in... cost of materials Increase in... Labor/other inputs Improvements in technology/weather Number of suppliers & expectation of lower prices in future
Term
 If the demand and price of a good increases What happens to that good's substitute
Definition
 Supply decreases. Suppliers gain more from selling a good at a higher price
Term
 Define income elasticity Give Equation
Definition
 Percent change in consumption due to a percent change in income   = Total Income    x   Change in quantity    Total quantity        Change in income
Term
 Define cross elasticity Give Equation
Definition
 How demand for good A changes w/ price of good Y   =  PriceofGoodY  x   %changeQdx     PriceofGoodX      %changePy   For substitutes: positive, for complementary, negative.
Term
 Income Elastic   vs   Income Inelastic
Definition
 Income Elastic: Incr in cons greater than incr in income   Income Inelastic: Incr in cons less than incr in income
Term
 If price elasticity = X   a Y% decrease in quantity of a good   will result in a ___ decrease in quantity
Definition
 X times Y = % decrease in Q   If incr in P > decr in Q, revenue decreases
Term
 If Demand is Elastic...   INCREASE in price will ____ total expenditure DECREASE in price will ____ total expenditure
Definition
 INCREASE in price will decrease total expenditure     (Incr P < Decr Q) DECREASE in price will increase total expenditure     (Decr P < Incr Q)
Term
 If Demand is Inelastic...   INCREASE in price will ____ total expenditure DECREASE in price will ____ total expenditure
Definition
 INCREASE in price will INCREASE total expenditure       (Incr P > Incr Q) DECREASE in price will DECREASE total expenditure       (Decr P > Incr Q)
Term
 Midpoint Formula
Definition
 NewP + InitialP                  2  _____________________     x         1            NewQ + InitialQ                   Slope                   2
Term
 How do substitution possibilities affect elasticity?
Definition
 More substitutions = more elastic
Term
 How does budget share affect elasticity?
Definition
 As an item makes up more of your budget it will become more elastic
Term
 How does time affect elasticity?
Definition
 The more time passes from a price change,   the more elastic.    (more time to find alternatives)
Term
 If supply function passes through origin, price elasticity is.... If supply function does not pass through origin, price elasticity...
Definition
 Zero along the whole curve   will become more elastic as you move along curve
Term
 If inputs can be used in a variety of production, price elasticity will be relatively...
Definition
 More elastic.    Options of subsitutes, producers will use inputs for cheapest production
Term
 When the cross price elasticity is negative, goods are
Definition
 compliments
Term
 When the cross price elasticity is positive, goods are
Definition
 substitutes
Term
 Income elasticity has 3 categories
Definition
 1)  >1        -normal good      -income elastic      -luxury good) 2) <1 but <0       -normal good       -income inelastic 3) >0       -inferior good
Term
 Cutoffs for Price Elasticity
Definition
 Elastic: more than 1   Inelastic: less than 1   Unit elastic: 1
Term
 How to calculate % change in Q    and   % change in P
Definition
 % change in Q |new Qd - old Qd|         old Qd   % change in P |new P - old P|         old P
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