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Unformatted text preview: Chapter 6- Elasticity: The responsiveness of demand and supply • Price elasticity of demand- the responsiveness of the quantity demanded to a change in price; measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product’s price • Elastic Demand- when elasticity is greater than 1 in absolute value • Inelastic Demand-when elasticity is less than 1 in absolute value • Unit-elastic Demand- when elasticity is 1 in absolute value • Perfectly inelastic demand- when a change in price results in no change in quantity demanded; addictive substances • Perfectly elastic demand- when a change in price results in an infinite change in the quantity demanded • Determinations of Price Elasticity of Demand o Availability of close substitutes- when more substitutes are available, there will be more elastic demand; the fewer substitutes, the less elastic demand o Passage of Time- the more time that passes the more elastic the demand for a product becomes o Luxuries vs. Necessities- the demand curve for a luxury is more elastic than the demand curve for a necessity o Definition of the market- the more narrowly defined the market, the more elastic the demand will be • Total Revenue- the total amount of funds received by a seller of a good or service; calculated by multiplying price per unit by the number of units sold • Cross-price elasticity of demand- the percentage change in quantity demanded of one good divided by the percentage change in the price of another good • Income elasticity of demand- a measure of the responsiveness of quantity demanded to changes in income; %change in Q/%change in income • Price elasticity of supply- the responsiveness of the quantity supplied to change in price; %change in Q supplied/% change in Price Chap. 7- Firms, the Stock Market, and Corporate Governance • Sole proprietorship- a firm own by a single individual and not organized as a corporation • Partnership- a firm own jointly by two or more persons and not organized as a corporation • Corporation- a legal form of business that provides the owners with limited liability • Asset- anything of value owned by a person or firm • Limited Liability- the legal provision that shields owners of a corporation from losing more than they have invested in the firm • Corporate Governance- the way in which a corporation is structured and the impact a corporation’s structure has on its behavior • Separation of ownership from control- in many large corporations the top management, rather than the shareholders, control day-to-day operations • Principal-agent problem- a problem caused by an agent pursuing his own interest of the principal who hired him • Indirect finance- a flow of funds from savers to borrowers through financial intermediaries such as banks. Intermediaries raise funds from savers to lend to firms (and other borrowers) • Direct Finance- a flow of funds from savers to firms through financial...
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This note was uploaded on 04/19/2008 for the course ECON 101 taught by Professor Gunter during the Fall '08 term at Lehigh University .
- Fall '08
- Price Elasticity