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| Three analytical tools consistent in microeconomics |
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Definition
1. Constrained optimization
2. Equilibrium analysis
3. Comparative statics |
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Definition
| used when a decision maker seeks to make the best(optimal) choice, taking into account any possible limitations or restrictions on the choices. Has two parts: objective function and constraint. |
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| the relationship that the decision maker seeks to "optimize", that is, either maximize or minimize. For example, a consumer may want to purchase goods to maximize her satisfaction, in which case the objective function is the relationship that describes how satisfied she will be when she purchases any particular set of goods. |
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Definition
| Restrictions or limits that are imposed on the decision maker. |
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Definition
| tells us how a dependent variable changes as a result of adding one unit of an independent variable. |
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Definition
| Measures the incremental impact of the last unit of the independent variable(output) on the dependent variable(total cost). Can be thought of as the rate of change of the dependent variable as the independent variable changes. |
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Definition
| A state or condition that will continue indefinitely as long as exogenous factors remain unchanged- that is as long as no outside factor upsets the equilibrium. |
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| When does the market "clear"? |
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Definition
| In a competitive market, equilibrium is achieved at a price at which the market clears- that is, at a price which the quantity offered for sale just equals the quantity demanded by customers. |
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Definition
| Less is demanded then is supplied, sellers do not all have buyers for their products. Creates a surplus. Sellers are willing to sell for less so the market price decreases, the excess supply is then eliminated. |
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Definition
| More is demanded than is supplied, some buyers are unable to obtain the good. Creates a shortage. Market price would need to rise to decrease demand, therefore eliminating the excess demand. |
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Definition
| Analysis used to examine how a change in some exogenous(given/independent) variable will affect the level of some endogenous(dependent) variable in an economic system. |
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Definition
| Analysis that attempts to explain how an economic system works or to predict how it will change over time. Answers explanative and predictive questions, " What is/will happening/happen?" |
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Definition
| analysis that typically focuses on issues of social welfare, examining what will enhance or detract from the common good. Answers prescriptive questions, "What should be done?" |
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Definition
| When the transactions of any individual buyer or seller are so small in comparison to the overall volume of the good or service traded in the market that each buyer or seller "takes" the market price as given when making purchase or production decisions. |
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Market dimension characterization:
1. commodity |
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Definition
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Term
Market dimension characterization:
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Definition
| the location in which purchases are being made |
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Term
Market dimension characterization:
3. Time
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Definition
| the period of time during which transactions are occurring |
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Definition
| a curve that shows us the quantity of goods that consumers are willing to buy at different prices. Negative slope of curve shows that demand goes down as prices rise. |
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Definition
| demand for a good that is derived form the production and sale of other goods. |
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Definition
| demand for a good that comes form the desire of buyers to directly consume the good itself |
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Definition
| The inverse relationship between the price of a good and the quantity demanded when all other factors that influence demand are held fixed. |
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Definition
| a curve that shows us the total quantity of goods that their suppliers are willing to sell at different prices. Slopes upward indicating that at higher prices suppliers of a product are willing to offer more for sale then at lower prices. |
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Definition
| The positive relationship between price and quantity supplied, when all other factors that influence supply are held fixed. |
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Definition
| Resources such as labor and raw materials that are used to produce a good. Influence quantity of the good that sellers are willing to supply. |
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Definition
| a point at which there is no tendency for the market price to change as long as exogenous variables remain unchanged. |
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Term
| Four basic laws of supply and demand: |
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Definition
1. Increase in demand+Unchanged supply curve=higher equilibrium price and larger equilibrium quantity.
2. Increase in supply+Unchanged demand curve= lower equilibrium price and larger equilibrium quantity.
3. Decrease in supply+Unchanged demand curve=higher equilibrium price and smaller equilibrium quantity.
4. Decrease in demand+Unchanged supply curve=lower equilibrium price and smaller equilibrium quantity. |
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Term
| Law of Diminishing marginal utility |
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Definition
| incremental benefit as quantity increases. Explains the demand curve. |
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Term
| Determinants of the demand curve shift: |
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Definition
1. income (I^,d^)
2. season-tastes and preferences (t^,d^)
3. price of compliment (P^, d-down)
4. number of consumers (C^,d^)
5. price of substitutes (Ps^,d^)
6. expectations (Pexp^,d^) |
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Term
| Determinants of the supply curve shift: |
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Definition
1. price of inputs (Pi^,S<)
2. technology (T^,S>)
3. Number of sellers/ firms (N^,S>)
4. Natural disasters, forces, weather, etc (D^,S<)
5. Expectations (Pe^,S???)
6. Price of alternatives (Pa^,S>) |
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Term
| Price elasticity of demand |
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Definition
| A measure of the rate of percentage change of quantity demanded with respect to price, holding all other determinants of demand constant. Change in quantity/change in price. Difference between this and the slope is that the slope is measured in percentages. |
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Term
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Definition
0= perfectly inelastic demand
quantity demanded is completely insensitive to price.
0 and -1= inelastic demand
quantity demanded in relatively insensitive to price
-1= unitary elastic demand
Percentage increase in quantity demanded is equal to percentage decrease in price
-1 and -infinity= elastic demand
quantity demanded is relatively sensitive to price
-infinity=perfectly elastic demand
any increase in rice results in quantity demanded decreasing to zero and any decrease in price results in quantity demanded increasing to infinity. |
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Term
| Linear demand curve equation: |
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Definition
Q=a-bP
a:constant; the effects of all the factors(income, prices of other goods)other than price that might effect demand for the good.
b:constant; how the price of the good affects the quantity demanded.
Q:quantity
P:price |
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Definition
Expresses price as a function of quantity. An equation for the demand curve that expresses price as a function of quantity. Solve demand curve function for P,
P=(a/b)-(1/b)Q |
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Term
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Definition
| Price at which the quantity demanded falls to 0(Q=0). Determined by a/b. |
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Term
| Determinants of the price elasticity of demand |
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Definition
1. More price elastic when there are substitute goods available for a product.
2. More price elastic when a consumer's expenditure on the product is large
3. Less price elastic when the product is seen by consumers as being a necessity. |
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Term
| income elasticity of demand |
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Definition
| Percent change in Q/Percent change in I. The ratio of the percentage change of quantity demanded to the percentage change of income, holding price and all other determinants of demand constant. Can be positive or negative. |
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Term
| Cross Price elasticity of demand |
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Definition
| Ratio of the percentage change of the quantity of one good demanded with resect to the percentage change in the price of another good. |
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Term
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Definition
| Ex. Chicken and beef: A higher price for chicken would mean a higher demand for beef. |
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Term
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Definition
| Ex. Cereal and Milk: A higher price of cereal would lower the demand for milk. |
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Term
| Price Elasticity of Supply |
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Definition
| Measures the sensitivity of quantity supplied to price. Tells us the percentage change in quantity supplied for each percent change in price. |
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Term
| Long-run demand vs short-run demand |
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Definition
| Long run demand is more elastic because consumers have time to adjust to changes in price, basically find an alternative. This graph is therefore "flatter". |
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Term
| Long run supply vs short run supply |
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Definition
| Long run supply is more elastic than short run because suppliers have time to adjust to a price change, basically have time to expand business operations in ways they couldn't overnight. This graph is therefore "flatter" than the short run graph. |
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Term
| Assumptions of consumer preferences |
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Definition
1. Preferences of complete-
Consumer is able to rank any two baskets.
2. Preferences are transitive-
Consumer makes choices that are consistent with each other. A to B, B to C, A to C
3. More is better-
Having more of a good is better for the consumer. |
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Term
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Definition
| A function that measures the level of satisfaction a consumer receives from any basket of goods and services. |
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Term
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Definition
| Rate at which total utility changes as the level of consumption rises. MU= change in U/ change in Y. Graphically, the marginal utility at a particular point is represented by the slope of a line that is tangent to the utility function at that point. |
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Term
| Why can total utility and marginal not be plotted on the same graph? |
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Definition
| The horizontal axis in the two graphs are the same, however, the vertical axes are different. |
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Term
| What is the slope of the (total) utility function? |
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Definition
| Marginal Utility. The slope at any point in the TU curve is the rate of change in TU at that point as consumption rises or falls, which is what marginal utility measures. This relationships holds true in all of economics. |
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Term
| Principle of diminishing marginal utility |
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Definition
| The principle that after some point, as consumption of a good increases, the marginal utility of that good will begin to fall. Basically, you don't value any good as much if you have enough of it. |
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Term
| Marginal Utility, when comparing two goods, of MUx is defined as: |
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Definition
| measuring how the level of satisfaction will change(change in U) in response to a change in the consumption of good x(change in x). So MUx= change in U/change in x, y held constant. |
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Term
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Definition
| a curve connecting a set of consumption baskets that yield the same level of satisfaction to the consumer |
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Term
| four properties of an indifference curve: |
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Definition
1. When the consumer likes both goods(MUx and MUy are both positive) all the indifference curves have a negative slope
2. Indifference curves cannot intersect
3. Every consumption basket lies on one and only one indifference curve
4. Indifference curves are not "thick" |
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Term
| Marginal Rate of substitution MRS |
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Definition
| A consumer's willingness to substitute one good for another while maintaining the same level of satisfaction. Can be expressed as the slope in the indifference curve. Change in y/change in x, expresses the MRS of hamburgers(x) for lemonade(y) or the amount of lemonade one would give up to gain additional hamburgers. |
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Term
| Diminishing marginal rate of substitution of x for y |
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Definition
| the marginal rate of substitution of one good for another good diminishes as the consumption of the first good increases along an indifference curve. |
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Term
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Definition
| two goods are perfect substitutes when the marginal rate of substitution of one for the other is a constant. Also, the indifference curve for any perfect substitutes will be a straight line. |
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Term
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Definition
| Consumer is completely unwilling to trade on item for another. In this case, the consumer will only consume in fixed proportions(ex. Right and Left tennis shoe). The indifference curve in this situation is made of straight line segments forming right angles |
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Term
| What does a preference of one good to another look like graphically? |
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Definition
| A preference to the y-axis good would be very flat; a preference to an x-axis good would be vary tall. |
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Term
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Definition
| Defines the set of baskets that a consumer can purchase with a limited amount of income. |
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Definition
| Indicates all of the combinations of food(x) and clothing(y) that a person can purchase if they spend all of their available income on the two goods. Expressed as: PxX+PyY=I. |
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Term
| How does an increase in income affect the budget line? |
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Definition
| Shifts BL outward in a parallel fashion. Conversely, a decrease in income would shirt the BL inward. |
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Term
| How does an increase in price affect the budget line? |
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Definition
| An increase in Px would move the intercept on that good's axis toward the origin. Conversely, a decrease of Px would move the intercept on that good's axis away from the origin. Either way, the slope of the budget line is affected. |
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Term
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Definition
| If we assume that a consumer makes purchasing decisions rationally, and we know the consumer's preferences and budget constraint, we can determine the consumer's optimal choice that is the optimal amount of each good to purchase. Means the consumer chooses a basket of goods that (1)maximizes his satisfaction(utility) and (2)allows him to live within his budget. MUST BE ON BUDGET LINE. |
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