1. Short Run, Long Run and Efficiency Micro Chapter 18

2. Cross Elasticity of Demand Measures how sensitive consumer purchases of one product are to a change in price of another product E xy = Percentage change in Q demanded x/ Percentage change in price of Y

3. Substitute Goods If Cross elasticity is > 0, x and Y are substitutes Ex- price of Coke goes up, more Pepsi is purchased

4. Complements Cross elasticity < 0, X and Y are complements An increase in the price of X causes a decrease in the demand for Y Ex- increase in the price of digital cameras leads to a decrease in the demand of memory cards

5. Independent Goods Zero or near zero cross elasticity means the items are unrelated Ex- walnuts and plums

6. Uses of Cross-Elasticity Government uses cross elasticity when deciding whether mergers will violate anti- trust laws

7. Income Elasticity of Demand E i = % change in quantity demanded/ % change in income Measures the degree to which consumers respond to a change in income in buying more or less of a particular good

8. Normal (Superior) Good E i > 0 More demand as income increases Ex- cars, vacation, electronics

9. Inferior Goods E i < 0 Consumers decrease their purchases of inferior goods as income goes up Ex- Ramen Noodles, retread tires

10. Consumer Surplus The difference between the amount consumer(s) are willing to pay and equil $ Equilibrium Price = $8 Consumer Surplus

11. Producer Surplus Difference between the actual price a producer receives and the min. acc. price S Price (Per Bag) P1P1 Q1Q1 Equilibrium Price = $8 Producer Surplus

12. Efficiency D S Price (Per Bag) P1P1 Q1Q1 Quantity (Bags) Consumer Surplus Producer Surplus Equilibrium Price = $8

13. Efficiency/Deadweight Loss Reductions of combined consumer and producer surpluses associated with underproduction or overproduction Quantities Q1

14. Efficiency Loss D S Price (Per Bag) P1P1 Q1Q1 Quantity (Bags) Efficiency Losses Q2Q2 Q3Q3