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Elasticity

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The percentage change in one variable divided by the associated percentage change in the other variable

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Price Elasticity of Demand

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The percentage change in quantity demanded divided by the percentage change in price

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Arc Price Elasticity of Demand

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A price elasticity of demand calculated using two distinct price-quantity pairs

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Arc Price Elasticity

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An elasticity that uses the average price and average quantity as the denominator for percentage calculations

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Point Elasticity

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Elasticity evaluated a specific price-quantity combination

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Linear Demand Curve Function

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Q = quantity

a = quantity that is demanded if the price is 0

b = how much the quantity demanded falls if the price is increased by one unit

a = quantity that is demanded if the price is 0

b = how much the quantity demanded falls if the price is increased by one unit

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Elasticity of demand for a linear demand curve

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1. Downward-Sloping

2. Horizontal

3. Vertical

2. Horizontal

3. Vertical

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What are the three types of linear demand curves?

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Varies with price

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*ε *of a downward-sloping demand curve

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-*∞* at every point

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*ε *of a horizontal demand curve

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0 at every point

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*ε *of a vertical demand curve

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Perfectly inelastic (*ε* = 0)

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The (downward-sloping) demand curve is __________________ __________________ where the demand curve hits the horizontal axis

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Perfectly elastic (*ε* approaches -*∞*)

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The (downward sloping) demand curve is __________________ ______________ where the demand curve hits the vertical axis

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Unitary elasticity (*ε* = -1)

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The (downward-sloping) demand curve has ______________ ____________________ at the midpoint of the demand curve

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Horizontal

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Goods which consumers view as identical often have ____________________ demand curves

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Vertical

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Essential goods have ________________ demand curves

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Y = income

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Income Elasticity of Demand

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A good whose quantity demanded increases as income increases

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Normal Good

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A good whose quantity demanded falls as income rises

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Inferior Good

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The percentage change in the quantity demanded divided by the percentage change in the price of another good

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Cross-Price Elasticity of Demand

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Complements

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If the cross-price elasticity is negative, the goods are ______________________.

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Substitutes

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If the cross-price elasticity is positive, the goods are ______________________.

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1. Long run

2. Short run

2. Short run

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Consumers often substitute between products in the ________ ______, but not in the __________ ______.

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The percentage change in quantity supplied divided by the percentage change in price

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Price Elasticity of Supply

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A statistical technique used to estimate the mathematical relationship between a dependent variable and a one or more explanatory variables

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Regression Analysis

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The variable whose variation is to be explained

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Dependent Variable

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The factor(s) that are thought to affect the value of the dependent variable

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Explanatory Variable(s)

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Q = a + bp

a = quantity that is demanded if the price is 0

b = how much the quantity demanded falls if the price is increased by one unit

a = quantity that is demanded if the price is 0

b = how much the quantity demanded falls if the price is increased by one unit

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Demand Function

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p = g + hQ

g = -a/b > 0

h = 1/b < 0

g = -a/b > 0

h = 1/b < 0

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Inverse Demand Function

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1. Dependent

2. Explanatory

2. Explanatory

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In regression analysis, we put the __________________ variable on the left side of the equation and the ______________________ variable on the right side.

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The effects of unobserved influences on the dependent variable that are not included as explanatory variables

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Random Error Term

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The gap between the actual value of the dependent variable and the predicted value

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Residual

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A regression wit two or more explanatory variables

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Multivariate Regression

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