CMA
ECO
ECO
Set of flashcards Details
| Flashcards | 30 |
|---|---|
| Language | Deutsch |
| Category | Micro-Economics |
| Level | Other |
| Created / Updated | 09.10.2011 / 07.06.2014 |
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Facts human nature is based on
1. human nature has unlimited desires
2. scarecity of economic resources
factors of production
land, labour capital (capital goods, investment goods)
and entrepreneurial ability
Problems that individuals and economy face
1) Individuals must decide how the spend their limited income to maximize their individual satisfaction
2) Economy deals with the allocation of limited resources
Questions an economic system must answer
1. What/how much goods and services must be produced
2. How should they be produced
3. For whom should they be produced
Def. Microeconomics
analyzes the operation of markets as a result of interactions between consumers and firms
Demand
quantity of goods and services that consumers are willing and able to purchase
-consumer wants greatest amount of utility
Law of demand
as the price of a product is reduced, the quantity demanded for the product will increase
cause for a movement along the demand curve
change in price of good
(all other changes will shift the entire curve)
causes for shift of the entire demand curve
change in:
- consumer income
- prices of other goods
- Consumer tasts and preferences
- Expectations of future price changes
- Number of consumers
changes that will cause a shift right of the demand curve
• An increase in consumer income, if the product is a normal gooda
• A decrease in consumer income, if the product is an inferior gooda. .
• An increase in the price of another good, if this product is a substitute gooda.
• A decrease in the price of another good, if this product is a complementary gooda.
• A positive change in the tastes and preferences of consumers toward a product (e.g., resulting from a successful advertising campaign).
• The expectation of price increases in the future.
• The conclusion of a group boycott
Determinants of Demand
1) Consumer income,
2) Prices of related goods,
3) Consumer expectations,
4) Consumer tastes and preferences, and
5) Number of consumers.
Inferior Goods
When incomes fall, people buy these goods because they cannot afford to buy more expensive products
Substitute Goods
if two products are substitutes for one another, then a price increase in one will gen-erate an increase in the demand for the other
Complementary Goods
if two products are complements (complementary products), then a price increase in one will result in a decrease in the demand for the other
Whether a particular good is a normal good or an inferior good is determined by
looking at the income elasticity of demand for the good
Whether a particular good is a substitute good or a complementary good is determined by
looking at the cross elasticity of demand
Consumer Expectations
If people think that the price of coffee will increase in the future, in order to avoid the higher price of coffee in the future, the demand for coffee may increase now
the price elasticity of demand (Ed)
measure how much the demand for the product will change given a certain amount of a change in the price of the item
The basic calculation of demand elasticity
percentage change in quantity demanded divided by the percentage change in price
Percentage change in quantity
amount of change divided by the original quantity
percentage change in price
amount of change divided by the original price
Elastic Goods
The demand for a product is said to be elastic (“responsive”) or relatively elastic if a 1% change in the price of the good causes more than a 1% change in the quantity demanded
Inelastic Goods
Similarly, the demand for a product is said to be inelastic (“unresponsive”) or relatively inelastic if a 1% change in the price of the good causes less than a 1% change in the quantity demanded
The Percentage Method
Ed = Percentage Change in Quantity Demanded = %?Q
------------------------------------------------------------ --------
Percentage Change in Price %?P
The Price Elasticity of Demand (Ed) – Midpoint Method
Ed = (Q2 – Q1) / [(Q2 + Q1) / 2]
--------------------------------------
(P2 – P1) / [(P2 + P1) / 2]
Ed=0
Perfectly Inelastic – This means that no matter what happens to the price, the quantity that is demanded will remain the same
Ed<1
Inelastic or relatively inelastic – Any given percentage change in price will result in a smaller percentage change in the quantity demanded
Ed=1
Unitary Elasticity – Any given percentage change in price will cause the quantity demanded to change by the same percent
Example: a 12% increase in price will cause the quantity demanded to fall by exactly 12%.
Ed>1
Elastic or relatively elastic – Any given percentage change in price will result in a larger percentage change in the quantity demanded
Factors Affecting the Elasticity of Demand
- Whether the good is classified as a luxury or a necessity
- The percentage of consumer income that is required to purchase the good
- number of substitutes (the more substitutes there are for a good, the more elastic the de-mand for the good, and the less substitutes there are, the more inelastic)
- The time period considered (the longer the time period analyzed, the more elastic the demand for any good
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