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inelastic
quantity purchased is not very responsive to price ex. gasoline, insulin
elastic
quantity purchased is responsive to price ex. movie ticket, pizza
Total Revenue
$*Q: the $ of a good times the Q of the good sold
inelastic
the absolute value of the percent change in quantity is smaller than absolute value of the percent change in price
elastic
the absolute value of the percent change in quantity is larger than the absolute value of the percent change in price
perfectly elastic
any change in price leads to an infinitely large change in quantity
Cost-Benefit Principle
Evaluate all costs and benefits for any choice you face, and pursue the choice if the benefits are at least as large as the costs (buyer and seller benefit)
Economic Surplus
benefits - costs
Opportunity Cost Principle
the true cost of something is the next best alternative you give up in order to
get it
Marginal Principle
decisions about quantities are best made incrementally
Interdependence Principle
your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future
Sunk costs
A cost that has been incurred and cannot be reversed
marginal benefit (MB)
the extra benefit you get from one more worker
marginal costs (MC)
the extra cost of that worker
rational rule
If something is worth doing, keep doing it until your marginal benefits equal your marginal costs
Individual Demand
the demand for one person
law of demand
The tendency for quantity demanded to be higher when the price is lower
market demand
how to go from individual demand to market demand
How does an increase in demand curve affect the demand curve?
demand more at every price, and demand curve shifts right.
How does a decrease in demand curve affect the demand curve?
demand less at every price, and demand curve shifts left
normal goods
good for which higher income causes an increase in demand
inferior goods
good for which higher income causes a decrease in demand
network effect
a good becomes more useful because other people use it
congestion effect
a good becomes less valuable because other people use it
How can firms estimate market demand?
a survey
P change
What causes movement along the demand curve?
What causes shifts of the demand curve?
increase or decrease in demand
What are some demand shifters?
income
Preferences
Prices of related goods
Expectations
Congestion and network effects
The type and number of buyers
If demand is inelastic raising prices will do what to revenue?
increase
If demand is inelastic lowering prices will do what to revenue?
decrease
If demand is elastic raising prices will do what to revenue?
decrease
If demand is elastic decreasing prices will do what to revenue?
increase
If demand is unit elastic changing prices will do what to revenue?
not change
Revenue
Price * Quantity
perfectly inelastic demand
= 0
inelastic demand
< 1
unit elastic demand
= 1
elastic demand
> 1
perfectly elastic demand
= infinity
Is elastic demand curve flat or curved compared to an inelastic demand curve?
flat
Note 
Flashcard (131)