Chapter 5
Buyer's Problem
1. What you want 2. Prices 3. How much money you have to spend
Arc elasticity
A method of calculating elasticities that does not depend on the starting point of calculation.
Inferior goods
Goods that have a negative income elasticity of demand.
Normal goods
Goods that have a positive income elasticity of demand.
Inelastic demand
Goods that have a price elasticity of demand less than 1.
Elastic demand
Goods with a price elasticity of demand greater than 1.
Income elasticity of demand
Measures the percentage change in quantity demanded due to a percentage change in income.
Cross-price elasticity
Measures the percentage change in quantity demanded of a good due to a percentage change in a related good's price.
Price elasticity of demand
Measures the percentage change in quantity demanded of a good due to a percentage change in its price.
Budget constraint
Shows the bundles of goods and services that use exactly all of a consumer's income.
Law of Demand
States that as price increases, quantity demanded decreases.
Quantity demanded
The amount of a good consumers will buy at a particular price.
Consumer surplus
The difference between the willingness to pay and the price paid for the good.
Willingness to pay
The highest price a consumer is willing able to pay for a good or service.
Elasticity
The measure of sensitivity of one variable to a change in another.
Budget set
The set of all possible bundles of goods and services that can be purchased with a consumer's income.
Complements
Two goods whose cross-price elasticity is negative.
Substitutes
Two goods whose cross-price elasticity is positive.
Perfectly elastic
When a very small increase in price causes consumers to stop using goods.
Unit elastic demand
When goods have a price elasticity of demand equal to 1.
Perfectly inelastic demand
When quantity demanded is unaffected by prices of goods.
Randomized experiments
When researchers assign by chance, not choice, participants into treatment and control groups.