ECS2601 Unit 2 - 5
Microeconomics - Ans>>A branch of economics that deals with the behaviour of
individual economic units.
Economic Model - Ans>>The interacting relationship between two or more
economic variables.
3 Fundamental Questions of Economics - Ans>>1. What to Produce
2. How Much to Produce
3. For Whom to Produce
Emergence of Price - Ans>>The interaction between consumers and producers
interacting on the market.
The Market is in Equilibrium - Ans>>The market is in Equilibrium with no Surplus or
shortages. Thus there are no pressures for the prices to change.
Market Mechanism - Ans>>The tendency in a free market for Price to change until
the market clears.
Equilibrium Price - Ans>>The price at which the market is in equilibrium. Thus the
quantity supplied equals the quantity demanded at a specific price. Qs = Qd
Disequilibrium - Ans>>Any point on the graph that is not at the equilibrium point.
Surplus - Ans>>Qs > Qd
Shortage - Ans>>Qs < Qd
Demand Curve - Ans>>The quantity of goods "consumers" are willing to buy at a
specific price. (Maximization of Utility)
Influenced by budget constraints.
Supply Curve - Ans>>The quantity of goods "producers" are willing to sell at a
specific price. (Maximization of Profit)
This is influenced by consumer demand the the costs of production.
Substitutes - Ans>>Two goods where an increase in price causes an increase in
demand for the second product.
Compliment - Ans>>two goods where a price increases for one causes the demand
to decrease for the second as they are both used together.
Elasticity Definition - Ans>>The percentage change in one variable resulting from a
1% increase in another.
Purpose of Elasticity - Ans>>It measures the sensitivity of one variable to another.
, Price Elasticity of Demand - Ep - Ans>>The percentage change of in quantity
demand of a good resulting from a 1% increase in its price.
Purpose of Price Elasticity of Demand - Ans>>Measures the sensitivity of the
quantity demanded relative to its price.
Price Elastic - Ans>>Ep > 1 → The percentage decline in Qd is greater that the
percentage increase in price.
• The curve is flatter
• Has many Subsititutes
Price Inelastic - Ans>>Ep < 1 → The percentage change in price barely affects the
Qd of the good.
• Steeper Curve
• Necesseties
Linear Demand - Ans>>Ep = 1 (y=mx + c)
The demand curve is in a straight line.
Infinitely Elastic - Ans>>Ep = ∞
Principle where consumers will buy as much of a good as possible within a specific
price.
Completely Inelastic - Ans>>Ep = 0
Principle that consumers will buy a fixed quantity of goods no matter the price.
Income Elasticity of Demand - Ans>>The percentage change in Qd due to a 1%
increase in income.
Income Elasticity of Demand Formula - Ans>>EI = (I/Q) x (ΔQ/ΔI)
Cross Price Elasticity of Demand - Ans>>The percentage change of Good A
resulting form a 1% increase in the price of Good B.
Cross Price Elasticity of Demand Formula - Ans>>
Point Elasticity of Demand - Ans>>The price at a specific point on the demand
curve.
Arc Elasticity of Demand - Ans>>The average price calculated between the original
price and the end price. (calculates the middle point)
Arc Elasticity of Demand Formula - Ans>>
Price Ceiling - Ans>>Implementing a maximum price allowed as the market
clearing price had been too high. This increases demand in excess and reduces
supply as producer with higher output costs will produce less.
Microeconomics - Ans>>A branch of economics that deals with the behaviour of
individual economic units.
Economic Model - Ans>>The interacting relationship between two or more
economic variables.
3 Fundamental Questions of Economics - Ans>>1. What to Produce
2. How Much to Produce
3. For Whom to Produce
Emergence of Price - Ans>>The interaction between consumers and producers
interacting on the market.
The Market is in Equilibrium - Ans>>The market is in Equilibrium with no Surplus or
shortages. Thus there are no pressures for the prices to change.
Market Mechanism - Ans>>The tendency in a free market for Price to change until
the market clears.
Equilibrium Price - Ans>>The price at which the market is in equilibrium. Thus the
quantity supplied equals the quantity demanded at a specific price. Qs = Qd
Disequilibrium - Ans>>Any point on the graph that is not at the equilibrium point.
Surplus - Ans>>Qs > Qd
Shortage - Ans>>Qs < Qd
Demand Curve - Ans>>The quantity of goods "consumers" are willing to buy at a
specific price. (Maximization of Utility)
Influenced by budget constraints.
Supply Curve - Ans>>The quantity of goods "producers" are willing to sell at a
specific price. (Maximization of Profit)
This is influenced by consumer demand the the costs of production.
Substitutes - Ans>>Two goods where an increase in price causes an increase in
demand for the second product.
Compliment - Ans>>two goods where a price increases for one causes the demand
to decrease for the second as they are both used together.
Elasticity Definition - Ans>>The percentage change in one variable resulting from a
1% increase in another.
Purpose of Elasticity - Ans>>It measures the sensitivity of one variable to another.
, Price Elasticity of Demand - Ep - Ans>>The percentage change of in quantity
demand of a good resulting from a 1% increase in its price.
Purpose of Price Elasticity of Demand - Ans>>Measures the sensitivity of the
quantity demanded relative to its price.
Price Elastic - Ans>>Ep > 1 → The percentage decline in Qd is greater that the
percentage increase in price.
• The curve is flatter
• Has many Subsititutes
Price Inelastic - Ans>>Ep < 1 → The percentage change in price barely affects the
Qd of the good.
• Steeper Curve
• Necesseties
Linear Demand - Ans>>Ep = 1 (y=mx + c)
The demand curve is in a straight line.
Infinitely Elastic - Ans>>Ep = ∞
Principle where consumers will buy as much of a good as possible within a specific
price.
Completely Inelastic - Ans>>Ep = 0
Principle that consumers will buy a fixed quantity of goods no matter the price.
Income Elasticity of Demand - Ans>>The percentage change in Qd due to a 1%
increase in income.
Income Elasticity of Demand Formula - Ans>>EI = (I/Q) x (ΔQ/ΔI)
Cross Price Elasticity of Demand - Ans>>The percentage change of Good A
resulting form a 1% increase in the price of Good B.
Cross Price Elasticity of Demand Formula - Ans>>
Point Elasticity of Demand - Ans>>The price at a specific point on the demand
curve.
Arc Elasticity of Demand - Ans>>The average price calculated between the original
price and the end price. (calculates the middle point)
Arc Elasticity of Demand Formula - Ans>>
Price Ceiling - Ans>>Implementing a maximum price allowed as the market
clearing price had been too high. This increases demand in excess and reduces
supply as producer with higher output costs will produce less.
