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ECON 101

Test 2 Elasticity/Consumer/Choices/Costs

elastic demand when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
elastic supply when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
elasticity an economics concept that measures responsiveness of one variable to changes in another variable
inelastic demand when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes
inelastic supply when the elasticity of supply is < 1, indicating that a 1% increase in price paid to the firm will result in < 1% increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)
price elasticity the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied
price elasticity of demand percentage change in the quantity demanded of a good or service divided the percentage change in price
price elasticity of supply percentage change in the quantity supplied divided by the percentage change in price
unitary elasticity when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied
constant unitary elasticity when a given percent price change in price leads to an equal percentage change in quantity demanded or supplied
infinite elasticity the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance
perfect elasticity see infinite elasticity
zero inelasticity the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance
perfect inelasticity see zero elasticity
tax incidence manner in which the tax burden is divided between buyers and sellers
cross price elasticity of demand the percentage change in the quantity of good A that is demanded as a result of a percentage change in good B
elasticity of savings the percentage change in the quantity of savings divided by the percentage change in interest rates
wage elasticity of labor supply the percentage change in hours worked divided by the percentage change in wages
budget constraint line shows the possible combinations of two goods that are affordable given a consumer’s limited income
consumer equilibrium when the ratio of the prices of goods is equal to the ratio of the marginal utilities (point at which the consumer can get the most satisfaction)
diminishing marginal utility the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit
marginal utility the additional utility provided by one additional unit of consumption
marginal utility per dollar the additional satisfaction gained from purchasing a good given the price of the product; MU/Price
total utility satisfaction derived from consumer choices
income effect a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect
substitution effect when a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect
backward bending supply curve for labor the situation when high wage people can earn so much that they respond to a still higher wage by working fewer hours
behavioral economics a branch of economics that seeks to enrich the understanding of decision
Fungible the idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual.
accounting profit total revenues minus explicit costs, including depreciation
economic profit total revenues minus total costs (explicit plus implicit costs)
explicit costs out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials
firm an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.
implicit costs opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned
private enterprise the ownership of businesses by private individuals
production the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs
revenue income from selling a firm’s product; defined as price times quantity sold
average profit profit divided by the quantity of output produced; profit margin
average total cost total cost divided by the quantity of output
average variable cost variable cost divided by the quantity of output
fixed cost expenditure that must be made before production starts and that does not change regardless of the level of production
marginal cost the additional cost of producing one more unit
total cost the sum of fixed and variable costs of production
variable cost cost of production that increases with the quantity produced
constant returns to scale expanding all inputs proportionately does not change the average cost of production
diseconomies of scale the long run average cost of producing each individual unit increases as total output increases
long run average cost (LRAC) curve shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology
production technologies alternative methods of combining inputs to produce output
short run average cost (SRAC) curve the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs
Created by: EdL
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