Chapter 5

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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.


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