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BEC3 - Microeconomics


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What determines the price of a good or service?
Demand and supply.
What causes a demand curve to shift?
When demand variables other than price change (price of other goods and services, price of complement products, consumer tastes, size of market, boycott).
What is the price elasticity of demand?
It measures that sensitivity of demand to a change in the product's price.
What does the result of the price elasticity of demand equation indicate?
If great than 1, demand is elastic; if less than 1, demand is inelastic; if 0, demand is unitary.
What is the difference between elastic, inelastic, and unitary demand?
Elastic demand is sensive to price changes, inelastic demand is not sensitive to price changes, and unitary demand is not sensitive or insensitive to price changes.
What is income elasticity of demand?
It measures the change in quantity demanded of a product given a change in consumer income.
What is the difference between normal goods and inferior goods?
The demand for normal goods goes up as income increases, and the demand for inferior goods goes down as income increases.
What is the cross-elasticity of demand?
It measures the change in demand for a good when the price of a related or competing product is changed.
What is the difference between a substitute product and a complementary product.
With a substitute, demand for the product goes up with an increase in the price of the other product; with a complement, demand for the product goes down.
What is the law of diminishing utility?
As a consumer obtains more of a product, the marginal utility from obtaining an additional unit of the product decreases.
What is the consumption function?
The relationship between changes in personal disposable income and consumption.
What does the slope of the consumption function measure?
The consumer's marginal propensity to consume - the percentage of an additional dollar in income that the consumer spends.
How can the marginal propensity to save be determined using the consumption function?
One minus the marginal propensity to consume.
What does a supply curve show?
The amount of a good or service that would be supplied at various prices?
What cause a supply curve shift?
When supply variables other than price change (government subsidies, government price controls, prices of other goods, or price expectations).
What is the elasticity of supply?
The percentage change in quantity supplied of a product when the price changes.
When does market equilibrium occur?
At the intersection of the demand and supply curve where all goods supplied will be sold.
What are the two ways in which government intervention can alter market equilibrium?
A price ceiling or a price floor.
What is the effect of a price ceiling?
Too few goods will be produced causing market shortages.
What is the effect of a price floor?
Too many goods will be produced causing overproduction.
Are production costs fixed or variable?
They are both fixed and variable in the short run, but all costs are variable in the long run because additional plant capacity can be added.
What are the possible outcomes of an increase in productive capacity?
Constant returns to scale, increasing returns to scale, and decreasing returns to scale.
When do firms stop producing a product in a competitive market?
Until marginal revenue is equal to marginal cost.

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