This preview shows pages 1–3. Sign up to view the full content.
Review for Second exam
Important Definitions
 know what we mean if we say:
Elastic.
Inelasatic. Unit elastic.
Perfectly elastic.
Perfectly inelastic.
Cross price
elasticity (complements and substitutes). Income elasticity. Elasticity of demand.
Corporation. Sole proprietorship. Partnership.
Tariff. Quota. Comparative advantage. Absolute advantage.
Utility. Marginal utility. Diminishing marginal utility. Marginal utility per dollar(divide
MU by price)
Average product (AP) divide total product by the number of the inputs (like workers).
Marginal product (MP) change in total product by adding one more input (like another
worker).
Economies of
Scale, Diseconomies of Scale, Constant returns to scale
Average cost (AC) total cost divided by total product . Marginal cost (MC) change in
total cost by adding one more input (like another worker in which case cost would
increase by his wage)
Perfect competition. Monopoly. Oligopoly. Monopolistic competition. Price taker.
Price discrimination. Labor market
Chapter 6
Understand elasticity: it’s the responsiveness of a dependent (like quantity) to a change in
and independent (like price).
It’s measured in percentages to take care of the units and is therefore not constant along a
straight line.
Price elasticity is negative (because Q goes down when P goes up) but we talk about it in
absolute value.
So when we say demand is elastic (elasticity is greater than 1) we mean absolute value.
Remember the definitions of elastic, inelastic, and unit elastic are talking about
percentage change in dependent over percentage change in independent and they are in
absolute terms.
Elastic
means a greater than 1% change in
the dependent for a 1% change in
independent.
Inelastic
is a less than 1% change in the dependent for a 1% change in the independent.
Unit Elastic
is an exact 1% change in dependent for a 1% change in the independent.
Crossprice
elasticity % change in quantity of one good for a 1% change in the price of
another good that has some relationship to the first good.
So if the goods are complements, the cross price elasticity will be negative, because
increasing the price of one good will
decrease the quantity demanded of the complement
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document good. Think what happens to quantity demanded of jelly if
price of peanut butter goes
up.
If they are substitutes, the cross price elasticity will be positive because raising the price
of one good will cause people to want more of the other good. Think computers and
printers.
Remember the definitions of
perfectly
elastic and inelastic
Income elasticity
 what percentage more you demand of a good if your income
increases. So, if it’s a normal good, the elasticity will be positive because you want more
when your income goes up. If it’s an inferior good, the elasticity is negative because you
want less if your income goes up.
Page 189 has a good review.
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 02/09/2008 for the course ECO 001 taught by Professor Gunter during the Spring '06 term at Lehigh University .
 Spring '06
 GUNTER
 Income Elasticity, Price Elasticity

Click to edit the document details