Chapter 4 (macro)

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21 Terms

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Price Ceiling
A government regulation that sets a maximum allowable price for a good or service.
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Price Floor
A government regulation that sets a minimum allowable price for a good or service.
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Elasticity of Demand
The percentage change in the quantity demanded of a good divided by the percentage change in the price of that good.
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Inelastic Demand
Demand where the price elasticity is less than 1, meaning quantity demanded is not very responsive to price changes.
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Elastic Demand
Demand where the price elasticity is greater than 1, meaning quantity demanded is very responsive to price changes.
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Unit Elastic Demand
Demand where the price elasticity is exactly equal to 1.
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Perfectly Elastic Demand
Demand with infinite price elasticity, represented by a horizontal demand curve.
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Perfectly Inelastic Demand
Demand with zero price elasticity, represented by a vertical demand curve.
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Cross-Price Elasticity of Demand
The percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good.
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Income Elasticity of Demand
The percentage change in the quantity demanded of a good divided by the percentage change in income.
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Supply Elasticity
The percentage change in the quantity supplied of a good divided by the percentage change in its price.
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Substitutes
Goods that can be used in place of each other; when the price of one increases, the demand for the other increases.
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Complements
Goods that are typically consumed together; when the price of one increases, the demand for the other decreases.
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Downside of Price Ceilings

if set below equilibrium price, it causes shortages

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Downside of Price Floor

if set above equilibrium price, it causes surpluses

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High elasticity (in terms of graphs)

decrease in demand is significant

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Low elasticity (in terms of graphs)

minimal change in demand as price changes

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Revenue Formula

Reveue = Price (P) * Quantity (Q)

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Elasticity Effects on Revenue

higher elasticity decreases revenue when prices rise and lower elasticity increases revenue

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Normal Goods

exhibits positive income elasticity

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Inferior Goods

shows negative income elasticity