Microeconomics Exam 1

Negative

Positive

Equilibrium

All other things being equal

• Increase- the curve shifts right (the consumer moves away from substitutes)
• Decrease- the curves shifts left (the consumer moves toward substitutes)

• 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.

The x-axis is quantity and the y-axis is price. Marshall started this convention.

• 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).

Goods for which demand decreases as income increases. Examples: used cars and clothing, intercity bus travel, canned food, etc.

Goods for which demand increases as income increases.

Move on the curve

Move the curve itself

Happiness derived from an individual satisfying their tastes. This need not be material!

• 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").

In a plot of a product and its substitute, each point represents (and so does the curve) equal utility. A consumer would be indifferent to any choices presented from the curve.

The principle that there is a negative relationship between price and quantity. As prices increase, demand falls, and vice versa.

• Tastes and preferences
• Income
• Price of related goods
• Number of buyers
• Expectations about future prices, incomes, and product availability

• 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.

Responsiveness of one variable to changes in another.

Measure of how responsive quantity demanded is to changes in price.

• Perfectly elastic (=∞): Any change in price results in quantity demanded dropping to zero.
• Relatively elastic (>1): Small changes in price result in large changes in quantity demanded.
• Unitary elastic (=1): Percent change in price result in the same percent change to quantity demanded.
• Relatively inelastic (<1): Large changes in price result in small changes in quantity demanded.
• Perfectly inelastic (=0): Large changes in price result in no change in quantity demanded. Perfect inelasticity is exhibited in strong addictions.

• 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.