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Chapter 6
Terms from Chapter 6
22
Economics
Undergraduate 2
10/18/2012

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Term
Price Elasticity of Demand (D)
Definition
A measure of the responsiveness of a quantity demanded due to a change in price
Term
Price Elasticity of Demand Equation
Definition
Price Elasticity of Demand=(Percent Change in Quantity Demanded)/(Percent Change in Price)
Term

Demand is elastic when:
|elasticity|<1

T/F

 

Definition

False

Demand is elastic when the absolute value of elasticity is greater than one

Term

Demand is inelasticelastic when:
|elasticity|<1

T/F

Definition
True
Term
Unit Elastic (D)
Definition
When elasticity is equal to +/- 1
Term
Midpoint Formula
Definition
Price Elasticity of Demand=[(Q2-Q1)/{(Q1 + Q2)/2}]/[(P1-P2)/{(P1+P2)/2}]
Term

When demand curves intersect, the flatter curve is less elastic

T/F

Definition
False
Term
Perfectly Inelastic (D)
Definition

When a demand curve line is a vertical line

 

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Term
Perfectly Elastic (D)
Definition

When a demand curve line is horizontal

 

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Term
Determinants of the Price Elasticity of Demand
Definition

Availability of close substitutes

Passage of time

Luxuries versus necessities

Definition of the market

Share of the good in the consumer's budget

Term
Availability of Close Substitutes and its effect on Elasticity
Definition
If a product has more substitutes available, it will have more elastic demand. If a product has less substitutes available, it will have less elastic demand.
Term
Passage of time and its effect on price elasticity
Definition
The more time that passes, the more elastic the demand for a product becomes
Term
Luxures versus necessities and its effect on price elasticity
Definition
The demand curve for a luxury is more elastic than the demand curve for a necessity
Term
Definition of the market and its effect on price elasticity
Definition
The more narowly we define a market, the more elastic the demand will be
Term
Share of a good in the consumers budgetand its effect on price elasticity
Definition
The demand for a good will be more elastic the larger the share of the good in the average consumer's budget
Term
Relationship between Price Elasticity of Demand and Total Revenue
Definition

Unit elastic is when total revenue is the greatest

 

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Term
Total Revenue (D)
Definition
The total amount of funds a firm receives from selling a good or service
Term
Cross Price Elasticity of Demand (D)
Definition
The effect on a product when the price of a substitute changes
Term
Cross Price Elasticity of Demand Equation
Definition
Cross Price Elasticity of Demand= (Percent change in quantity demanded of one good)/(Percent change in price of another good)
Term
Income Elasticity of Demand (D)
Definition
Measures the responsiveness of quantity demanded to changes in income
Term
Income Elasticity of Demand Equation
Definition
Income Elasticity of Demand= (Percent change in quantity demanded)/(Percentage change in income)
Term
Price Elasticity of Supply Equation
Definition
Price Elasticity of Supply = (Percent change in quantity supplied)/(Percent change in price)
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