ECON 2005 Exam 1 Terms
Price elastic
If E(D) is >1 then demand is
Elasticity
A measure of the responsiveness of buyers and sellers to changes in price or income
Substitute
A rise in the price of one good will cause the quantity demanded of that good to decline but the demand for the substitute will rise
Sunk costs
Costs that have been incurred and cannot be reversed. Do not consider sunk costs when making a decision
Interdependence principle
Idea that no decision is completely independent. The decisions we make are based on the decisions in the world around us
Society has limited resources
Dependence between people or businesses in some markets
Dependency between your individual choice
Factors that limit the decisions you can make between two or more choices
Economic surplus
Following the rational rule economic surplus is maximized when marginal benefits equal marginal costs
Income elasticity
How much a change in price will affect spending (normal or inferior good)
Price inelastic
If E(D) is <1 then demand is
Voluntary Trade
If buyers and sellers always follow the principle of voluntary trade both will only participate in trade if it benefits them
less than zero
Items are compeiments when the cross price elasticity is ___________
greater than zero
Items are substitutes when the cross price elasticity is ___________
Price elasticity of supply
Measure the responsiveness of the quantity supplied to price changes using the price elasticity of supply.
Price elasticity of demand
Measures how buyers change their consumption of a good given a change in the price of that good
PPF (Production Possibilities Frontier)
Model that illustrates the combination of outputs that a society can produce if all of its resources are used efficiently
substitute
Pizza hut and dominoes is an example of a
Absolute value
Price elasticity is in ____________ so we can ignore the negative
Dependency between markets
Prices and changes in one market can create changes in your market.
Dependency through time
Resources can be used across time. Decisions today can affect you tomorrow
Law of Increasing Opportunity Costs
States that if the economy uses all resources efficiently, then each additional increment of one good requires the economy to sacrifice successively larger and larger increments of the other good
Trade offs
The choices not chosen are part of the opportunity cost of the choice made
Scarcity
The limited amount of resources when compared to society's unlimited wants and needs
Cross price elasticity
The responsiveness of the quantity demanded of one good to a change in the price of a related good
complements
Turkey and gravy are
Normal Good
Will have income elasticity that is positive, the purchase of the good rises as income rises
Inferior Good
Will have income elasticity will be negative, as income rises purchases of good decreases
Complement
rise in the price of one good will make the consumption of both goods more expensive and demand for both goods will decrease
Microeconomics
the branch of economics that focuses on the choices and decision-making of individuals and firms
