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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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