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