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Elasticity
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A general concept used to quantify the response in one variable when another variable changes
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Profit
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total revenue - costs
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Own Price Elasticity of Demand
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The ratio of the percentage of change in quantity of demanded to the percentage of change in price; measures the responsiveness of quantity demanded to changes in price.
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Price elasticity of demand (OP)
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= % change in quantity demanded / % change in price
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Arc Elasticity (OP)
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measures average price elasticity between TWO points on the demand curve
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Interpretation of own price
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a 1% increase in price leads to an x% change in quantity purchased over this arc
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Perfectly elastic (OP)
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approaching infinity
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elastic (OP)
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>1
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unitary (OP)
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=1
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Inelastic (OP)
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<1
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Perfectly inelastic
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0
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Total revenue
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price x quantity
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when price declines, quantity demanded
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increases
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When price increases, quantity demanded
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decreases
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Income Elasticity of Demand
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The ratio of the percentage of change in quantity demanded to the percentage of change in income; measures the responsiveness to quantity demanded to changes in income.
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income elasticity
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% change in quantity demanded / % change in income
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arc elasticity
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measures average income elasticity between two points on the engel curve
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Interpretation of Income
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a 1% increase in income leads to an x% change in quantity purchased over this arc
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normal good (Income)
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>1 (luxury)
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normal good (Income)
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<1, >0 (necessity)
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Inferior good (Income)
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<0
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Cross Price Elasticity
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the ratio of the percentage of change in quantity demanded in one good to the percentage of change in price of another good; measures the responsiveness of quantity demanded to changes in the price of another good.
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cross price equation
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% change in quantity demanded of X / % change in price of Y
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arc cross price elasticity
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measures the extent to which good are related
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Interpretation of CP
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a 1% increase in price of Good Y leads to an x% change in quantity purchased of Good X
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Substitutes are
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positive
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Compliments are
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negative
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independent are
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zero
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always take the absolute value of
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own price elasticity
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