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Economics
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decision making with a specific toolset
-social science (how a decision is made)
-social science (how a decision is made)
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Scarcity
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A situation in which unlimited wants exceed the limited resources available to fulfill those wants.
-forces someone to make choices
-forces someone to make choices
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Incentives
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A positive or negative environmental stimulus that motivates behavior.
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Positive Incentives
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Offer rewards/ payment for an action.
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Negative Incentives
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Discourage an action by giving consequences.
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Direct Incentives
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Generally easy to recognize
-"This is what I want, and I will give you this to do it."
-"This is what I want, and I will give you this to do it."
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Indirect Incentives
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A secondary change in behavior brought on by the original incentive.
-by reaching the sales quota, they spend less time with family
-by reaching the sales quota, they spend less time with family
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Unintended Consequences
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The unexpected and unplanned results of a decision or action (usually negative).
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Opportunity Cost
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Cost of the next best alternative use of money, time, or resources when one choice is made rather than another.
(cost of what is being given up to obtain something)
(cost of what is being given up to obtain something)
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Economic Thinking
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Requires a purposeful evaluation of the available opportunities to make the best decision possible.
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Marginal Thinking
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Make the decision whether the benefit of one more unit of something is greater than cost.
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Comparative Advantage
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When a person/company can produce at a lower opportunity cost than another.
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Positive Statements
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Can be tested and validated.
Describes "what is."
Describes "what is."
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Normative Statements
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An opinion that cannot be tested or validated.
Describes "what ought to be."
Describes "what ought to be."
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Endogenous Factors
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Variables that can be controlled for inside a model.
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Exogenous Factors
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Variables that cannot be accounted for in a model.
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Production Possibilities Frontier
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Illustrated the combinations of outputs that a society can produce if all its resources are being efficiently.
-Slopes down because you must give up one to get another
-Not a constant slope because it will become steeper as OC of producing a good will rise as production increases (steeper from left to right)
-Slopes down because you must give up one to get another
-Not a constant slope because it will become steeper as OC of producing a good will rise as production increases (steeper from left to right)
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Economics is the study of
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how to allocate resources to satisfy wants and needs
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Entrepreneurs are willing to take risks because
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the patent and copyright system provides an exclusive right to sell the product for a period of time.
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Opportunity Cost of an exam is
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the highest valued alternative that someone gave up to prepare for and attend the exam.
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Comparative advantage emerges because
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of the presence of differing Opportunity Costs.
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Law of Demand
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The claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises.
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Inferior goods
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Goods for which demand tends to fall when income rises.
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Normal Goods
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Goods for which demand goes up when income is higher and for which demand goes down when income is lower.
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Price elasticity of demand
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A measure of the sensitivity of demand (consumer's sensitivity)to changes in price.
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Price elasticity of supply
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The measure of the sensitivity of the quantity supplied (producer's sensitivity) to changes in price of a good.
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Elastic
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Describes demand that is very sensitive to a change in price.
-Can drink both coke and pepsi
-bigger numbers
-Can drink both coke and pepsi
-bigger numbers
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Inelastic
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Describes demand that is not very sensitive to a change in price.
-Can only drink coke
-small numbers
-Can only drink coke
-small numbers
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Law of Supply
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The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.
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Cross-Price Elasticity
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The percentage change in demand for product A that occurs in response to a percentage change in price of product B.
-Positive for substitutes
-Negative for complements
-Positive for substitutes
-Negative for complements
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Law of Increasing Opportunity Cost
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To produce more of one good, a successively larger amount of the other good must be sacrificed.
-why the PPF slope is how it is
-why the PPF slope is how it is
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Specialization
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The limiting of one's work to a particular area.
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Absolute Advantage
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One person can perform one task more efficiently than another.
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Terms of Trade
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The relative prices or exchange rate of goods.
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Short Run
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The period in which we make decisions that reflect our immediate or short term wants, needs, or limitations.
-consumers can only partially adjust behavior
-consumers can only partially adjust behavior
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Long Run
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The period in which we make decisions that reflect our needs, wants, and limitations over a long term horizon.
-consumers have time to fully adjust to market conditions
-consumers have time to fully adjust to market conditions
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short run v. long run
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Long run has a larger quantity of produced capital and consumer goods.
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Capital Goods
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Goods that help produce other valuable goods.
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Market
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Place where buyers and sellers meet.
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Market Economy
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Resources are allocated among households and firms with little or no government interference.
-producers and consumers are motivated by self interest.
-producers and consumers are motivated by self interest.
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Invisible Hand
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Term economists use to describe the self-regulating nature of the marketplace.
-guides resources to their highest valued uses
-guides resources to their highest valued uses
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Competitive Market
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-Many buyers and sellers
-Similar goods are sold
-No individual influence over the price
-Similar goods are sold
-No individual influence over the price
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Imperfect Market
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Buyer or seller has an influence on the price.
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Market Power
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The firm's ability to influence price.
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Monopoly
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A single company that supplies the entire market for a good or service.
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Quantity Demanded
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The amount of a good buyers are willing and able to purchase at the current price.
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Market Demand
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Horizontal sum of all individual quantities demanded by each buyer in the market at each price.
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Change in Quantity Demanded
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Movement along a demand curve.
-caused by price change
-caused by price change
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Change in Demand
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Shift of the demand curve.
-caused by nonprice factors
-caused by nonprice factors
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Changes in Income (demand)
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-Normal goods: buy more when income is higher
-Inferior goods: buy less when income is higher
-Inferior goods: buy less when income is higher
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Price of Related Goods (demand)
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-Complements: Buy less if the complement becomes more expensive
-Substitutes: Buy more of the substitute if the other becomes expensive.
-Substitutes: Buy more of the substitute if the other becomes expensive.
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Changes in Tastes and Preferences (demand)
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Good may become more fashionable or not (in and out of season).
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Price Expectations (demand)
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Consumption today may depend on what we think the price may be tomorrow.
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Number of Buyers
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More individual buyers mean more market demand.
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Taxes
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Excise taxes raise the cost to consumers.
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Quantity Supplied
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The amount of the good or service that producers are willing and able to sell at the current price.
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Change in Quantity Supplied
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Movement along a supply curve.
-caused by price change
-caused by price change
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Change in Supply
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Shift in the supply curve.
-caused by a change in nonprice factors
-caused by a change in nonprice factors
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The Cost of Inputs (supply)
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Resources used in the production process.
-more expensive = less supply
-more expensive = less supply
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Changes in Technology (supply)
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Knowledge that producers have about how to produce a product.
-less knowledge = less supply
-less knowledge = less supply
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Taxes and Subsidies (supply)
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Tax
-Tax paid by producer -> added cost of production
Subsidy
-"opposite" of a tax; government pays sellers to produce goods
-reduces cost of production
-Tax paid by producer -> added cost of production
Subsidy
-"opposite" of a tax; government pays sellers to produce goods
-reduces cost of production
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Number of Sellers (supply)
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More individual sellers means more market supply.
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Price Expectations (supply)
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Higher price expected tomorrow delays sales until future.
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Law of Supply and Demand
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The market price of any good will adjust to bring the quantity supplies and quantity demanded into balance.
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Equilibrium Price
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The price at which quantity supplied is equal to quantity demanded.
-the price that "clears the market"
-the price that "clears the market"
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Equilibrium Quantity
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The quantity at which quantity demanded is equal to quantity supplied.
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Shortage
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Occurs at price below equilibrium.
-price will rise over time toward equilibrium
-price will rise over time toward equilibrium
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Surplus
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Occurs at any price above equilibrium.
-price will fall over time toward equilibrium
-price will fall over time toward equilibrium
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Demand Increases
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-Demand curve shifts right
-equilibrium price and equilibrium quantity increase
-equilibrium price and equilibrium quantity increase
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Supply Increases
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-Supply curve shifts right
-equilibrium price declines
-equilibrium quantity increases
-equilibrium price declines
-equilibrium quantity increases
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Demand Decreases
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-Demand curve shifts left
-Equilibrium price and equilibrium quantity decrease
-Equilibrium price and equilibrium quantity decrease
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Supply Decreases
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-Supply curve shifts left
-Equilibrium price increases
-Equilibrium quantity decreases
-Equilibrium price increases
-Equilibrium quantity decreases
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Demand and Supply Both Increase
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-Both curves shift right
-Equilibrium quantity increase
-Equilibrium price remains same
-Equilibrium quantity increase
-Equilibrium price remains same
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Demand and Supply Both Decrease
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-Both curves shift left
-Equilibrium quantity decreases
-Equilibrium price remains same
-Equilibrium quantity decreases
-Equilibrium price remains same
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Demand Increases and Supply Decreases
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-Demand curve shifts right
-Supply curve shifts left
-Equilibrium price increases
-Equilibrium quantity stays same
-Supply curve shifts left
-Equilibrium price increases
-Equilibrium quantity stays same
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Demand Decreases and Supply Increases
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-Demand curve shifts left
-Supply curve shifts right
-Equilibrium price decreases
-Equilibrium quantity remains same
-Supply curve shifts right
-Equilibrium price decreases
-Equilibrium quantity remains same
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Price Elasticity of Demand
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A measure of responsiveness of quantity demanded to price change.
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Existence of Substitutes
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The closer the substitutes and the more substitutes there are, the more elastic is demand.
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Share of the Budget Spent on the Good
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Determines how much the price change affects the consumer.
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Necessities v Luxuries Elasticity
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-Luxuries are elastic
-Necessities are inelastic
-Necessities are inelastic
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Market is Broad or Narrow
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-Narrow = less substitutes = inelastic
-Broad = more substitutes = elastic
-Broad = more substitutes = elastic
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Time and Adjustment Process (Demand)
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Affects the ability of consumers to respond to changes in price.
-short term = inelastic
-long term = elastic
-short term = inelastic
-long term = elastic
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Price Elasticity of Demand Formula
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(% change quantity demanded)/ (% change price)
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Elasticity on Graph
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-Relatively elastic demand curves are FLATTER
-Relatively inelastic demand curves are STEEPER
-Relatively inelastic demand curves are STEEPER
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Total Revenue
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The amount that consumers pay and sellers receive for a good.
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Income Elasticity of Demand
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Measures how a change in income affects spending.
(% change in QD) / (% change in income)
(% change in QD) / (% change in income)
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EI Values
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EI > 0 = Normal Good
-Necessities 1 > EI > 0
-Luxuries EI > 0
EI < 0 = Inferior Good
-Necessities 1 > EI > 0
-Luxuries EI > 0
EI < 0 = Inferior Good
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Cross Price Elasticity of Demand Formula
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(% change in QD of X) / (% change in P of Y)
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Cross-Price Elasticity Values
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EC > 0 = Substitutes
EC < 0 = Complements
EC < 0 = Complements
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Price Elasticity of Supply
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Measures the responsiveness of the quantity supplied to a change in price.
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Flexibility of Producers
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More production flexibility implies more elastic supply.
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Time and Adjustment Process (supply)
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Immediate Run
-Suppliers are stuck with what they have; no change
Short Run, Long Run
-Over time, the firm is able to adjust to market conditions.
-Becomes more Elastic
-Suppliers are stuck with what they have; no change
Short Run, Long Run
-Over time, the firm is able to adjust to market conditions.
-Becomes more Elastic
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Price Elasticity of Supply Formula
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(% change in QS) / (% change in P)