Microeconomics Exam 1
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Microeconomics Exam 1
Do demand curves have a positive or negative slope?
Do supply curves have a positive or negative slope?
What is the intersection of the supply and demand curves called?
All other things being equal
What happens to the demand curve when the price of substitutes changes?
Increase- the curve shifts right (the consumer moves away from substitutes)
Decrease- the curves shifts left (the consumer moves toward substitutes)
What happens to the demand curve when the price of complementary goods changes?
Increase- the curve shifts left (consumers must pay more for the complement and therefore reduce consumption of both goods)
Decrease- the curve shifts right (consumers pay less for the complement and increase consumption of both goods.
On supply and demand curves, which axis is price and which is quantity?
The x-axis is quantity and the y-axis is price. Marshall started this convention.
What happens to the demand curve when income changes?
Increase- Curve shifts right for normal goods (as consumers are able to purchase more of a good at the same price)
Decrease- Curve shifts left for inferior goods (as consumers purchase less of inferior goods and substitute to normal goods).
What is an inferior good?
Goods for which demand decreases as income increases. Examples: used cars and clothing, intercity bus travel, canned food, etc.
What is a normal good?
Goods for which demand increases as income increases.
What moves when prices change?
Move on the curve
What moves when other variables change?
Move the curve itself
What is utility?
Happiness derived from an individual satisfying their tastes. This need not be material!
What are the assumptions of indifference analysis?
1. Consumers are driven by the maximization of utility.
2. Consumers and producers are knowledgeable.
3. Law of Diminishing Marginal Rate of Substitution.
4. More is preferred to less.
5. Preferences are transitive (also known as "consumers are rational").
What is an indifference curve?
In a plot of a product and its substitute, each point represents (and so does the curve) equal utility. A consumer would be
to any choices presented from the curve.
What is the law of demand?
The principle that there is a negative relationship between price and quantity. As prices increase, demand falls, and vice versa.
What are the determinants of demand?
Tastes and preferences
Price of related goods
Number of buyers
Expectations about future prices, incomes, and product availability
What is the difference between a change in demand versus a change in quantity demanded?
Change in demand
: determinants of demand change so
the demand curve shifts
Change in quantity demanded
: the price of a good changes so there is
movement along the curve.
What is elasticity?
Responsiveness of one variable to changes in another.
What is price elasticity of demand
Measure of how responsive quantity demanded is to changes in price.
What are the classifications of elasticity?
Perfectly elastic (
: Any change in price results in quantity demanded dropping to zero.
Relatively elastic (
: Small changes in price result in large changes in quantity demanded.
Unitary elastic (
: Percent change in price result in the same percent change to quantity demanded.
Relatively inelastic (
: Large changes in price result in small changes in quantity demanded.
Perfectly inelastic (
: Large changes in price result in no change in quantity demanded. Perfect inelasticity is exhibited in strong addictions.
What are the assumptions of the Theory of Marginal Utility?
Individuals look to maximize utility.
As quantity increases, each additional unit is valued less than the previous (law of diminishing marginal utility).
Utility is cardinally measurable.