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Elasticity
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Percentage Change in Quantity divided by Percentage Change in Price
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Elastic
answer
If the price elasticity is greater than 1, the demand is...
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Inelastic
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If the price elasticity is less than 1, the demand is...
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Unit elastic
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If the price elasticity is equal to 1, the demand is...
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Revenue
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Price times Quantity
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Perfectly Elastic Demand
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Price elasticity is infinite. Horizontal Slope.
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Perfectly Inelastic Demand
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Price elasticity is equal to zero. Vertical Slope.
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Cross-Price Elasticity of Demand
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The percentage change in quantity demanded of good A from a 1 percent change in the price of good B.
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Complements
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Negative cross-price elasticity.
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Substitutes
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Positive cross-price elasticity.
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Income Elasticity of Demand
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The percentage change in quantity demanded from a 1 percent change in income.
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Law of Demand
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People do less of what they want to do as the cost of doing it rises.
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Utility
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The satisfaction people derive form consumption.
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Marginal Utility
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The additional utility from consuming one more. Change in utility divided by change in consumption.
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Law of Diminishing Marginal Utility
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Tendency for additional utility gained from consuming an additional unit of a good to decrease as consumption increases beyond some point.
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Rational Spending Rule
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Spending should be allocated across goods so that the marginal utility per dollar is the same for each good.
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Substitution Effect
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When the price of a good goes up, substitute for that good are relatively more attractive.
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Income Effect
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Changes in price affect the buyers' purchasing power.
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Nominal Price
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The absolute price of a good in terms of dollars. The price on the price tag in the store.
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Real Price
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The nominal price of a good relative to the average dollar price of all other goods. Changes due to inflation.
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Market Demand
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The horizontal sum of individual demand curves.
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Identical Individual Demand Curve
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Occurs where all buyers demand exactly the same quantity at each price.
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Consumer Surplus
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The difference between the buyer's reservation price and the market price.
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Productivity
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Measured by looking at the time it takes a worker to produce a good.
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Profit
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Total Revenue minus total cost.
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Short Run
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The period of time when at least one of the firm's factors of production is fixed.
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Long Run
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The period of time in which all inputs are variable.
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Law of Diminishing Returns
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When some factors of production are fixed, increased production of the good eventually requires even larger increases in the variable factor.
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Fixed Cost
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The sum of all payments for ______ inputs. Often referred to as the capital cost.
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Variable Cost
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The sum of all payments for ________ inputs. The total labor cost.
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Total Cost
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Sum of all payments for inputs. Fixed cost plus variable cost.
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Marginal Cost
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The change in total cost divided by the change in output.
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Average Variable Cost
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Variable cost divided by quantity.
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Average Total Cost
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Total cost divided by quantity.
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Accounting Profit
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Total revenue minus explicit costs.
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Explicit Costs
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Payments firms make to purchase resources and products from other firms.
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Economic Profit
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The difference between a firm's total revenue and the sum of its explicit and implicit costs.
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Implicit Costs
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The opportunity costs of the resources supplied by the firm's owners.
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Normal Profit
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The difference between accounting profit and economic profit.
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Rationing Function
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Distributes scarce goods to the consumers who value them most highly.
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Invisible Hand Theory
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States that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources.
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Economic Efficiency
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Exists when no change could be made to benefit one party without harming the other.
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Price Ceiling
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Maximum allowable price, specified by law.
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Price Subsidies
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Meant to assist low-income consumers, government funding of "essential" goods and services.
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Free Entry and Exit Barrier
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Any force that prevents firms from entering a new industry. (legal constraints, practical factors, etc.) Required for the Invisible Hand Theory.
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Economic Rent
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The portion of a payment to a factor of production that exceeds the owner's reservation price.
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