What are perfect substitutes?
What are perfect substitutes?
A perfect substitute can be used in exactly the same way as the good or service it replaces. This is where the utility of the product or service is pretty much identical. For example, a one-dollar bill is a perfect substitute for another dollar bill.
When two goods are perfectly complementary the indifference curve will be?
If the two goods are perfect complements the indifference curve is right-angled or L shaped, as shown in Figure 43 (A).
Can indifference curves be concave?
The indifference curves are usually convex to the origin. But the possibility of indifference curves being concave to the origin cannot be ruled out in some exceptional cases. Concavity of the indifference curves implies that the marginal rate of substitution of X for y increases when more of X is substituted for Y.
What are the assumptions of indifference curve?
The negative slope of the indifference curve reflects the assumption of the monotonicity of consumer’s preferences, which generates monotonically increasing utility functions, and the assumption of non-satiation (marginal utility for all goods is always positive); an upward sloping indifference curve would imply that a …
When two goods are perfectly complement IC is?
When two goods are perfect complements, they are represented by a ‘L’ shaped indifference curve.
How do you tell if goods are complements or substitutes?
We determine whether goods are complements or substitutes based on cross price elasticity – if the cross price elasticity is positive the goods are substitutes, and if the cross price elasticity are negative the goods are complements.
What is a complementary good example?
A Complementary good is a product or service that adds value to another. In other words, they are two goods that the consumer uses together. For example, cereal and milk, or a DVD and a DVD player. On occasion, the complementary good is absolutely necessary, as is the case with petrol and a car.
What happens when two goods are complements?
If two products are complements, an increase in demand for one is accompanied by an increase in the quantity demanded of the other. For example, an increase in demand for cars will lead to an increase in demand for fuel. If the price of the complement falls, the quantity demanded of the other good will increase.
What are two goods that can be considered substitutes?
An example of substitute goods are tea and coffee, these two goods satisfy the three conditions: tea and coffee have similar performance characteristics (they quench a thirst), they both have similar occasion for use (in the morning) and both are usually sold in the same geographic area (consumers can buy both at their …
When two goods are substitutes if the price of good A increases?
Two goods are substitutes if an increase in the price of one causes an increase in the demand for the other. Two goods are complements if an increase in the price of one causes a decrease in the demand for the other.
What happens when two goods are complements quizlet?
If two goods are complements, the demand for one rises as the price of the other falls (or the demand for one falls as the price of the other rises). A price at which the quantity demanded does not equal the quantity supplied.
When there is a decrease in both demand and supply?
b. If both demand and supply decrease, there will be a decrease in the equilibrium output, but the effect on price cannot be determined. 1. If both demand and supply decrease, consumers wish to buy less andfirms wish to supply less, so output will fall.
What will happen in the rice market now if buyers expect higher?
What will happen in the rice market if buyers are expecting higher prices in the near future? The demand for rice will increase. a decrease in equilibrium price and an increase in equilibrium quantity.
What happens if there is a shortage of a good at the current price?
If a surplus exist, price must fall in order to entice additional quantity demanded and reduce quantity supplied until the surplus is eliminated. If a shortage exists, price must rise in order to entice additional supply and reduce quantity demanded until the shortage is eliminated.
What causes demand to change?
Factors that can shift the demand curve for goods and services, causing a different quantity to be demanded at any given price, include changes in tastes, population, income, prices of substitute or complement goods, and expectations about future conditions and prices.
What are some examples of shortage?
Shortages
- Temporary supply constraints, e.g. supply disruption due to weather or accident at a factory.
- Fixed prices – and unexpected surge in demand, e.g. demand for fuel in cold winter.
- Government price controls, such as maximum prices.
- Monopoly which restricts supply to maximise profits.
Does a binding price floor cause a shortage?
When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result. When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result.
What makes a price floor binding?
A binding price floor occurs when the government sets a required price on a good or goods at a price above equilibrium, reports the Corporate Finance Institute. Because the government requires that prices not drop below this price, that price binds the market for that good.
What is the difference between a binding and non-binding price ceiling?
Price controls can be thought of as “binding” or “non-binding.” A non-binding price control is not really an economic issue, since it does not affect the equilibrium price. If a price ceiling is set at a level that is higher than the market equilibrium, then it will not affect the price.