# Wiley CPA Module 40

## Terms

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Demand curve shifts when:
- When demand variables other than price change
Variables that cause a demand curve shift and the effect on demand
- Direct relationship:

Price of substitute goods
Expectations of price increase
Consumer income (normal goods only)
Size of market

- Inverse relationship:

Price of complement goods
Consumer income (inferior goods only)
Group boycott

- Indeterminate relationship:

Consumer tastes
Price elasticity of demand
- Measures the sensitivity of demand to a change in price

- Arc method: (Change in quantity demanded/Average quantity)/(Change in price/Average price)
Interpretation of the demand elasticity coefficient
- Greater than 1 = elastic
- Less than 1 = inelastic

- Elasticity is greater when: More substitutes for good; Larger percentage of income spent on good
Relationship between price elasticity of demand and total revenue
- Elastic demand: Price increase leads to decreased revenue; price decrease leads to increased revenue

- Inelastic demand: Price increase leads to increased revenue; price decrease leads to decreased revenue
Income elasticity of demand
- (Percentage change in quantity demanded)/(Percentage change in income)

- Positive for normal goods; negative for inferior goods
Cross-elasticity of demand
- Measures the change in demand for a good when the price of another product is changed

- (Percentage change in quantity demanded)/(Percentage change in price of other product)

- Positive for substitute goods; negative for complement goods; zero for unrelated goods
Law of diminishing marginal utility
- The more goods an individual consumes the more total utility he receives

- However, the marginal utility from consuming each additional unit decreases
A consumer maximizes utility when:
- When the marginal utility of the last dollar spent on each commodity is the same
Consumption function (relationship between personal disposable income and consumption)
C = a + bY

where
C = consumption for a period
Y = disposable income for a period
a = constant
b = slope of the consumption function
Marginal propensity to consume (and save)
MPC = slope of the consumption function = how much of each additional dollar in personal income that the consumer will spend

MPS = percentage of additional income that is saved

MPC + MPS = 1
A supply curve shift occurs when:
When supply variables other than price change
Variables that cause a supply curve shift and the effect on supply
- Direct relationship:

Number of producers
Government subsidies
Government price controls
Price expectations

- Inverse relationship:

Change in production costs