Study Guides (248,454)
Canada (121,562)
Economics (205)
ECON 2310 (7)
Final

Exam Notes

20 Pages
384 Views
Unlock Document

Department
Economics
Course
ECON 2310
Professor
B Ferguson
Semester
Fall

Description
Chapter 2- Supply and Demand September 8, 2013 10:52 AM Definitions Demand Curve- shows how much buyers if the product want to buy at each possible price, holding fixed all other factors the affect demand Substitutes- two products are substitutes, if all else equal, an increase in the price of one of the products causes buyers to demand more of the other product Compliments- two products are compliments, if all else equal, an increase in the price of one of the products causes consumers to demand less of the other product Demand Function- describes the amount of the product that is demanded for each possible combination of its price and other factors Example Formula Inverse Demand Function- the function for a firm's product describes how much the firm must change to sell any given quantity of its product Example Formula Supply Curve- shows how much sellers of a product want to sell at each possible price, holding fixed all other factors that affect supply Supply Function- describes the amount of the product that is supplied for each possible combination of its price and other factors Example Formula Inverse Supply Function- Example Formula Equilibrium Price- the price at which the amounts supplied and demanded are equal Elasticity- the elasticity of Y with respect to X, denoted E equals the percentage change in Y divided by the percentage change in X, or equivalently, the percentage change in Y for each one percent increase in X Price Elasticity of Demand- denoted Ed, equals the percentage change in the amount Price Elasticity of Demand- denoted Ed, equals the percentage change in the amount demanded for each one percent increase in the price Linear Formula Non-Linear Formula Elastic- demand is elastic when the elasticity of demand is less than -1 Inelastic- demand is inelastic when the elasticity of demand is greater than -1 (that is between -1 and 0) Perfectly Elastic- demand is perfectly elastic when the demand curve is horizontal so that the elasticity od demand equal negative infinity Perfectly Inelastic- demand is perfectly inelastic when the demand curve is vertical so that the elasticity of demand is zero Constant Elasticity- (or isoelastic) demand curve has the same elasticity at every price Price Elasticity of Supply- denoted Es, equals the percentage change in the amount supplied for each one percent increase in the price Linear Formula Non-Linear Formula Perfectly Elastic- supply is perfectly elastic when the supply curve is horizontal so that the price elasticity of supply is infinite Perfectly Inelastic- supply is perfectly inelastic when the supply curve is vertical so the price elasticity of supply is zero Income Elasticity of Demand- equals the percentage change in the amount of demanded for each one percent increase in income Normal Good- the demand for a product increases when income grows larger Inferior Good- if demand decreases when income grows larger Cross-Price Elasticity of Demand- equals the percentage change in the amount demanded of the product for each one percent increase in the price of the other product Movements and Shifts in Demand Curve A change in the price of a product causes a movement along its demand curve, resulting in a A change in the price of a product causes a movement along its demand curve, resulting in a change in the quantity (or amount) demanded. A change in some other factor (such as consumer tastes or income, or the price of other products) causes a shift of the entire demand curve, known as a change in demand Movements and Shifts in Supply Curve A change in the price of a product causes a movement along its supply curve, resulting in a change in the quantity (or amount) supplied. A change in some other factor (such as technology or input prices) causes a shift of the entire supply curve, known as a change in supply Effects on Changes in Demand or Supply Source of Change Effect on Price Effect on Amount Bought/Sold Increase in Demand Rises Rises Decrease in Demand Falls Falls Increase in Supply Falls Rises Decrease in Supply Rises Falls Price Responsiveness of Demand and Supply 1) The demand curve shifts: the steeper the supply curve, (the less responsive the amount supplied is to price), the larger the price change and the smaller the change in the amount bought and sold 2) The Supply curve shifts: the steeper the demand curve (the less responsive the amount demanded is to price), the larger the price change and the smaller the change in the amount bought and sold Total Expenditure and the Elasticity of Demand A small increase in the price causes total expenditure to increase if demand is inelastic, and decrease if demand is elastic. Total expenditure is largest at a price for which elasticity equals -1 Changes in Market Equilibrium and the Elasticity of Demand and Supply 1) When the demand curve shifts: the less elastic the supply curve at the initial equilibrium price, the larger the price change and the smaller the change in the amount bought and sold 2) When supply curve shifts: the less elastic the demand curve at the initial equilibrium price, the larger the price change and the smaller the change in the amount bought and sold Chapter 3- Balancing Benefits and Costs September 11, 2013 12:18 PM Definitions Opportunity Cost- the cost associated with forgoing the opportunity to employ a resource in its best alternative use Net Benefit- equals total benefit less total cost Marginal Units- the marginal units of an action choice X are the last units, where is the smallest amount you can add or subtract Marginal Cost of an Activity- at an activity level of X units is equal to the extra cost incurred due to the marginal units Marginal Benefit of an Action- at an activity level of X is equal to the extra benefit produced by the marginal units Sunk Cost- a cost that the decision maker has already incurred or is committed to pay. It is unavoidable The Relationship Between Marginal Benefit and the Total Cost Curve When actions are finely divisible, the marginal benefit when choosing action X is equal to the slope of the total benefit curve at X The Relationship Between Marginal Cost and the Total Cost Curve When actions are finely divisible, the marginal cost when choosing action X is equal to the slope of the total cost curve at X The No Marginal Improvement Principle (for Finely Divisible Actions) If actions are finely divisible, then marginal benefit equals marginal cost (MB = MC) at any best choice at which it is possible to both increase and decrease the level of activity a little bit Chapter 4- Principles and Preferences September 15, 2013 5:08 PM Definitions Preferences- tells us about a consumer's likes and dislikes Indifferent- a consumer is indifferent between two alternatives when liking (or disliking) them equally Consumption Bundle- the collection of goods that an individual consumes over a given period, such as an hour, a day, a month, a year or a lifetime Indifference Curve- starting with any alternative, an indifference curve shows all the other alternatives that a consumer likes equally well Family of Indifference Curves- a collection of indifference curves that represents the preferences of the same individual Bad- a bad is an object, condition or activity that makes a consumer worse off Marginal Rate of Substitution for X with Y- written is the rate at which a consumer must adjust Y to maintain the same level of well-being when X changes by a tiny amount, from a given starting point Declining MRS- an indifference curve that has a declining MRS if it becomes flatter moving along the curve from the northwest to the southwest Perfect Substitutes- two products are perfect substitutes if their functions are identical, so that a consumer is willing to swap one for the other at a fixed rate Perfect Compliments- two products are perfect compliments if they are valuable only when used together in fixed proportions Utility- a numeric value indicating the consumer's relative well-bring. Higher utility indicates greater satisfaction than lower utility Utility Function- a mathematical formula that assigns a utility value to each consumption bundle Ordinal- allows to determine only whether one alternative is better or worse than another Cardinal- tells us something about the intensity of those preferences Marginal Utility- the change in the consumer's utility resulting from the addition of a very small amount of some good, divided by the amount added General Principles of Consumer Decision Making The Ranking Principle A consumer ranks, in order of preference (though possibly with ties), all potentially available alternatives The Choice Principle Among the available alternatives, the consumer selects the one that he ranks the highest The More-Is-Better Principle When one consumption bundle contains more of every good than a second bundle, a consumer prefers the first bundle Properties of Indifference Curves and Families of Indifference Curves 1) Indifference curves are thin 2) Indifference curves do not slope upward 3) The indifference curve that runs through any consumption bundle, call it A, separates all the better than A bundles from all the worse than A bundles 4) Indifference curves from the same family never cross 5) In comparing any two bundles, the consumer prefers the one located on the indifference curve that is furthest from the origin Chapter 5- Constraints, Choices, and Demand September 22, 2013 7:48 PM Definitions Income- a consumers income consists of the money received during some fixed period of time Budget Constraint- identifies all of the consumption bundles a consumer can afford over some period of time Budget Line- shows all of the consumption bundles that just exhaust a consumers income Rationed- when the government or a supplier limits the amount that each consumer can purchase, we say that the good is rationed Interior Choice- an affordable bundle is an interior choice if, for each good, there are affordable bundles containing a little bit more of that good and affordable bundles containing a little bit less of it. When the best affordable choice is an interior choice, we call it an interior choice Tangency Condition- a bundle on the budget line satisfies the tangency condition if, at that bundle, the budget line lies tangent to the consumer's indifference curve Boundary Choice- at a boundary choice there are no affordable bundles that contain either a little bit more or a little bit less of some good. When the consumer's best choice is a boundary choice, we call it a boundary solution Price-Consumption Curve- shows how the best affordable consumption bundle changes as the price of a good changes, holding everything else fixed (including the consumers income and preferences as well as all other prices) Individual Demand Curve- describes the relationship between the price of a good and the amount a particular consumer purchases, holding everything else fixed Income Effect- the change in the consumption of a good that results from a change in income Income Consumption Curve- shows how the best affordable consumption bundle changes as income changes, holding everything else fixed (including prices and the consumer's preferences) Engel Curve- describes the relationship between income and the amount consumed, holding everything else fixed (including prices and the consumers preferences) The Properties of a Budget Line 1) The budget line is the boundary that separates the affordable consumption bundles from all other bundles. Choices that do not exhaust the consumer's income lie to the southwest of the budget line 2) The slope of the budget line equals the price time -1 =, with the price of the good measured on the horizontal axis appearing in the numerator, and the price of the good measured on the vertical axis appearing in the denominator 3) The budget line intersects the axis that measures the amount of any particular good, X, at the quantity M/Px, which is the amount of X the consumer can purchase by spending all income on X 4) A change in income shifts the budget line outward for an increase and inward for a decrease without changing its slope 5) A change in the price of a good rotates the budget line outward for a decrease and inward for an increase. The line pivots at the intercept for the good with the unchanged price and changes the slope of the budget line 6) Multiplying all prices by a single constant has the same effect on the budget line as dividing income by the same constant. Changing prices and income by the same dividing income by the same constant. Changing prices and income by the same proportion has no effect on the budget line The No-Overlap Rule The area above the indifference curve that runs through the consumer's best affordable bundle does not overlap with the area below the budget line. The area above the indifference curve that runs through any other affordable bundle does overlap with the area below the budget line Properties of Best Choices 1) Assuming that more is better, the consumer's best choice lies on the budget line 2) We can recognize the best choices by applying the no-overlap rule 3) Interior solutions always satisfy the tangency condition. Consequently, if a bundle that includes two goods, X and Y, is an interior solution, then At that bundle 4) When indifference curves have declining MRSs, any interior choice that satisfies the tangency condition is a best affordable choice 5) Whenever the consumer purchases good X but not good Y, then Properties of Normal and Inferior Goods 1) The income elasticity of demand is positive for normal goods and negative for inferior goods 2) We can tell whether goods are normal or inferior by examining the slope of the income- consumption curve 3) At least one good must be normal starting from any particular income level 4) No good can be inferior at all levels of income Substitution and Income Effect October 24, 2013 9:30 AM Indifference curves for these preferences have a declining MRS. Therefore you can use the recipe from class to calculate income and substitution effects. Recall that the substitution effect bundle must satisfy 2 conditions: At this bundle, the MRS is equal to the new price ratio. And the utility of this bundle is the same as the utility of the original bundle purchased before the price change. Since numbers are drawn randomly, here is a particular example to show how to solve the question. Suppose that px=2 and py=1. Income is M=24. Then the price of x increases to px=8. 1) What is the optimal bundle before the price change? a) MRSxy=px/py implies y/x = 2 and therefore y=2x. b) Plug this into the budget constraint: M=24=2x+y=2x+2x. This implies that x=6 and y=12. Btw, the utility at this bundle, which we will need later for the substitution effect bundle, is U=xy=6* 12=72. 2) What is the 'substitution effect bundle'? a) At this bundle, the MRS is equal to the new price ratio, so that MRSxy=y/x=8. Therefore, y=8x. b) This bundle lies on the same indifference curve as the initial bundle. Therefore, the utility of the substitution effect bundle needs to be the same as the utility of the initial bundle. Above, we calculated this utility to be 72. Therefore, for the utility of the substitution effect bundle needs to be 72=xy. Plug the condition from part a into this and you get 72=x*8x. Therefore, x=3 and y=24. This is the substitution effect bundle. 3) What is the optimal bundle after the budget constraint? a) The price ratio is now the new price ratio, so MRSxy=y/x=8. (This is the same as condition a for the substitution effect bundle.) Therefore, y=8x. b) Plug this condition into the budget constraint: M=24=8x+y=8x+8x. Therefore, x=1.5 and y=12. The substitution effect is change in demand from the initial to the substation effect bundle, so 3-6 =-3. The income effect is the change in demand from the substitution effect bundle to the final bundle, so 1.5=3=-1.5. Chapter 6- From Demand to Welfare September 29, 2013 12:41 PM Definitions Uncompensated Price Change- consists of a price change with no change in income Compensated Price Change- consists of a price change and an income change which leave the consumer's wellbeing unaffected Substitution Effect of a Price Change- the effect on consumption of a compensated price change Income Effect of a Price Change- the effect on consumption of removing compensation after creating a compensated price change Law of Demand- states that demand curves usually slope downward Giffen Good- a product is called a Giffen good if the amount purchased increases as the price rises Compensating Variation- the amount of money that exactly compensates the consumer for a change in circumstances Consumer Surplus- the net benefit a consumer receives from participating in the market for some good Cost of Living Index- measures
More Less

Related notes for ECON 2310

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit