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
Technological advances
Prices of other goods - Price elasticity of supply
-
- Percentage change in quantity supplied resulting from a change in the product price
- Elastic if greater than 1, inelastic if less than 1