Principal of Maximization:

-the desire to improve the well being and achieve the best
-to maximize as much as possible

Principal of Subsituition:
-when one is willing to substitute a good for another
-doesnt tell you how much one is willing to subsitite for another good, because its all a matter of
preference
-a relationship between how much one is willing to pay and able to pay
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Consumer Surplus:
-the difference of the maxiumum amount that the consumer is willing to pay and the amount that
they actually pays

Scarcity:
-when people want a good more than it is avaliable

Equilibrium:
-a situation where no one wants to change their behaviour because they are already doing the
best they can
-when market supply and demand balances each other out = EQUILIBRIUM
-when the supply of goods matches the demand
-maximization occurs when consumer is in equilibrium —> when consumer ends up with Q x P
-consumer is in equilibrum when relative price = marginal value
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Marginal Value:
-the maxiumum amount of a good that a person is willing to give up for one additional
unit of another good
-(money de ntoin): the highest price that the consumer is willing to pay for one additional unit

Total Value:
-the maximium amount that one is willing to pay for a given quantity, rather than have none at all

Total Expenditure:
-the total spending
-when consumers buy at Price x Quantity amount
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Marginal Cost:
-the additional cost to you & above the cost that already happened

Marginal Utility/ Bene t:

-the satisfaction that a person receieves from consuming one additional unit

Diminishing Marginal Value:

-the maxiumum that one is willing to sarci ce for an additional of a good will diminish over time
the more the person consumes of that good
-marginal value falls the more you consume
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Real Income:
-the income thats adjusted after effects like in ation
-measured by: M / P
-nominal income divided by the price of good 2

Nominal Income:
-the income thats before effects like in ation

Relative Price:
-the measure of how many other goods one has to sacri ce to obtain more of one good
-eg: when you buy 1 unit of a designer bag, you couldve bought many other bags
-measured by: P1 / P2
-price 1 divided by price 2
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Law of Demand:
-when price goes up, quantity goes down
-when price goes down, quantity goes up

Demand Curve:
-height of the demand curve: is the price and marginal value
-subsituition occurs when consumers move down the demand curve
-when the price falls, they substitute out of other goods and into this good
-maximization occurs when consumer is in equilibrium —> when consumer ends up with Q x P
-consumer is in equilibrum when relative price = marginal value

Quantity demanded is in uenced by:

-products own price
-consumer’s income
-price of other goods
-tastes
-population
-expecations of the future
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Change in Demand:
-a shift in the demand curve
-is a change in the quantity demanded at every price of the good

Change in Quantity Demand:

-is a change along the demand curve
-the change is cause by a change in the price
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Price (Point) Elasticity:
-measures elasticity of demand at certain point
Arc Elasticity:
-measures the average elasticity of demand between 2 points
Income Elasticity:
-the measure of the responsiveness of quantity demanded to change in income
-negative/ positive signs matter!!
Cross Price Elasticity:
-the measure of the responsiveness of the quantity of one good to a change in price of another
good

—> Cross Price & Income uses same formula

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Elasticity:
-is a measure of responsiveness

Perfectly Inelastic:
-number is 0
-vertical line straight up
-quantity demanded/ supplied does not change at all when price changes
-eg: when price goes up, consumers buying habits stay the same
Inelastic:
-the number is between 0 and 1
-quantity demanded/ supplied changes by a smaller percentage than price
-if its inelastic, total revenue and price moves in the same dirrection
-goods that have small subsitutes
-goods that take up smaller fractions of ones budget like bubble gum

Unitary Elastic:
-the number is 1
-quantity demanded/ supplied changes exactly the same as the price
-% change in price is the same %change in demand

Elastic:
-if the number is greater than 1 but less than in nity
-quantity demanded/ supplied changes by a larger percentage than does price
-small change in price leads to a large change in quantity
-if its elastic, total revenue and price moves in opposite directions
-goods that have lots of subsititues are elastic
-goods that take up a large fraction of one’s budget have a larger elasticity

Perfectly Elastic:
-number is in nity
-horizontal line all across
-consumers & sellers buy/ sell at a certain price, or none at all at high/low price
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—> the more an item is consumed on a regular basis, the lower its income elasticity
Normal Goods: +
-when the income increases, the demand for goods increases too
-has a posivie income elasticity E > O

Inferior Goods: -
-when the income increases, the demand for goods decreases
-has a negative income elasticity E < O
-inferior goods have a negative relationship between income & demand

Subsitute Goods: +
-goods that can be used in place of another good to satisy similiar needs
-when the price of good 1 increases, then the demand for similiar good 2 increases too
-is positive

Compliment Goods: -
-goods that have to be consumed together like car & gas
-when the price of good 1 increases, then the demand for good 2 decreases
-is negative
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Theorem of Exchange:
-all gains from trade are exhausted at the margin = maximized = at equilibrium

Rent Controls:
-a housing shortage, where quantity demanded exceeds quantity supplied
-impacts:
-leads to people competing for the rooms
-leads to people who do get the rooms have a transfer of wealth
-leads to a reduction if the number of rooms avaliable (sometimes a few rooms are used for other
purposes like shops etc)
—> leads to a loss of consumer and seller surplus, since no one gets the bene t
-called “deadweight loss”
—> because of the dead weight loss, it makes buyers and sellers worse off
Transfer of Wealth:
-it use to be seller’s surplus but since theres rent control, it is consumer’s surplus now
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Short Run:
-production is xed

Long Run:
-production is varied

Ef ciency:
-where every resource is allocated and used to its fullest potential while minimizing waste &
Inef ciency

Inef ciency:
-when any changes made to assist one person would harm another
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