Econ Chapter 5

substitutes

goods consumers substitute for one another depending on their relative prices, such as coffee and tea. substitutes have a positive cross elasticity of demand

complements

goods that are typically consumed together, such as coffee and sugar. complements have a negative cross elasticity of demand

luxury goods

goods that have income elasticities greater than 1. when consumer income grows, quantity demanded of luxury goods rises more than the rise in income

inferior goods

goods that have income elasticities that are negative. when consumer income grows, quantity demanded falls for inferior goods

normal goods

goods that have positive income elasticities of less than 1. when consumer income grows, quantity demanded rises for normal goods, but less than the rise in income.

income elasticity of demand

measures how responsive quantity demanded is to changes in consumer income

Price elasticity of demand

a measure of the responsiveness of quantity demanded to a change in price, equal to the percentage change in quantity demanded divided by the percentage change in price

price elasticity of supply

a measure of the responsiveness of quantity supplied to changes in price. an elastic supply curve has elasticity greater than 1. whereas inelastic supplies have elasticities less than 1. time is the most important determinant of the elasticity of supply

cross elasticity of demand

measures how responsive the quantity demanded of one good is to changes in the price of another good. substitute goods have positive cross elasticities: an increase in the price of one good leads consumers to buy more of the other good whose price has not changed. complementary goods have negative cross elasticities: an increase in the price of a complement leads to a reduction in sales of the other good whose price has not changed

unitary elastic supply

price elasticity of supply is equal to 1. the percentage change in quantity supplied is equal to the percentage change in price

elastic supply

price elasticity of supply is greater than 1. the percentage change in quantity supplied is greater than the percentage change in price

inelastic supply

price elasticity of supply is less than 1. the percentage change in quantity supplied is less than the percentage change in price

total revenue

price times quantity demanded (sold). if demand is elastic and price rises, quantity demanded falls off significantly and total revenue declines, and vice versa. if demand is inelastic and price rises, quantity demanded does not decline much and total revenue rises, and vice versa.

incidence of taxation

refers to who bears the economic burden of a tax. the economic entity bearing the burden of a particular tax will depend on the price elasticities of demand and supply

unitary elasticity of demand

the absolute value of the price elasticity of demand is equal to 1. the percentage change in quantity demanded is just equal to the percentage change in price

elastic demand

the absolute value of the price elasticity of demand is greater than 1. elastic demands are very responsive to changes in price. the percentage change in quantity demanded is greater than the percentage change in price

inelastic demand

the absolute value of the price elasticity of demand is less than 1. inelastic demands are not very responsive to changes in price. the percentage change in quantity demanded is less than the percentage change in price

deadweight loss

the loss in consumer and producer surplus due to inefficiency because some transactions cannot be made and therefore their value to society is lost

long run

time period long enough for firms to alter their plant capacities and for the number of firms in the industry to change. existing firms can expand or build new plants, or firms can enter or exit the industry

market period

time period so short that the output and the number of firms are fixed. agricultural products at harvest time face market period. products that unexpectedly become instant hits face market periods (there is a lag between when the firm realizes it has a hit on its hands and when inventory can be replaced).

short run

time period when plant capacity and the number of firms in the industry cannot change. firms can employ more people, use overtime with existing employees, or hire part-time employees to produce more, but this is done in an existing plant