Microeconomics 4

Curve relating the quantity of a good that a single consumer will buy to its price.

An increase in a person’s income can lead to less consumption of one of the two goods being purchased.

Curve relating the quantity of a good consumed to income.

Two goods are substitutes if an increase in the price of one leads to an increase in the quantity demanded of the other.

Two goods are complements if an increase in the price of one good leads to a decrease in the quantity demanded of the other.

Two goods independent if a change in the price of one

good has no effect on the quantity demanded of the other.

1. Consumers will tend to buy more of the good that has

become cheaper and less of those goods that are now

relatively more expensive.

2. Because one of the goods is now cheaper, consumers

enjoy an increase in real purchasing power.

Change in consumption of a good associated with a change in its price, with

the level of utility held constant.

Change in consumption of a good resulting from an increase in purchasing

power, with relative prices held constant.

In this case, food is an inferior good

because the income effect is negative.

However, because the substitution

effect exceeds the income effect, the

decrease in the price of food leads to

an increase in the quantity of food

demanded.

Good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect.

Curve relating the quantity (x) of a good that all consumers in a market will buy to its price (y).

When demand is inelastic (i.e. Ep is less than one in absolute value), the quantity demanded is relatively unresponsive to changes in price. As a result, total expenditure on the product increases when the price increases.

When demand is elastic (Ep is greater than one in absolute value), total expenditure on the product decreases as the price goes up.

Demand curve with a constant price elasticity.

Difference between what a consumer is willing to pay for a good and the amount actually paid.

Situation in which each individual’s demand depends on the purchases of other individuals.

Positive network externality in which a consumer wishes to possess a

good in part because others do.

Negative network externality in which a consumer wishes to own an

exclusive or unique good.