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Elastic Demand
answer
% increase in price leads to a larger % decrease in quantity demanded. PED in absolute terms is greater than 1.
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Inelastic Demand
answer
% increase in price leads to a smaller percentage decrease in quantity demanded. PED in absolute terms is less than 1.
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Cross price elasticity
answer
- a positive number means they are substitutes
- a negative number means they are compliments
- Cross elasticity of demand for goods that are complements is negative because an increase in the price of one would tend to decrease demand for the other. Cross elasticity of demand for substitutes is positive.
- a negative number means they are compliments
- Cross elasticity of demand for goods that are complements is negative because an increase in the price of one would tend to decrease demand for the other. Cross elasticity of demand for substitutes is positive.
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Income elasticity of demand
answer
sensitivity of quantity demanded to changed in income
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Unit elastic
answer
total revenue is maximized at the quantity where own-price elasticity equals -1
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Normal good
answer
income increases, demand increases, elasticity > 0
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Inferior good
answer
income increases, demand decreases, elasticity > 1
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Substitution effect
answer
always increases consumption of the good for which the price has fallen
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Income effect
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is positive for a normal good and negative for an inferior good
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Gifen good
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an inferior good where for a certain range of prices, the quantity purchased decreases as the price decreases due to the income effect dominating
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Veblen good
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a status symbol good for which a decrease in price leads to decrease in quantity purchased, as people value the good less
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Diseconomies of scale
answer
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Diseconomies of scale
answer
the situation in which a firm's long-run average costs rise as the firm increases output
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economies of scale
answer
factors that cause a producer's average cost per unit to fall as output rises
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Diseconomies of scale
answer
the situation in which a firm's long-run average costs rise as the firm increases output
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economies of scale
answer
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