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ECON 3400: Chapter 3

Chapter 3 Concepts
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created March 31, 2016
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TermDefinition
The Multiple Determinants of Demand
Price ElasticityA measure of the responsiveness of a good's sales to changes in price
The Demand FunctionThe relationship between the quantity sold of a good or service and one or more variables
Normal GoodAn increase in customer income leads to increased sales
Inferior GoodAn increase in customer income leads to a decrease in sales
Substitute GoodCan compete with and substitute for the good in question
Complementary GoodsIf an increase in demand for one good causes an increase in demand for the other Ep = dQ/dP
Price Elasticity of DemandRatio of percentage change in quantity and the percentage change in the good's price. Ep = (dQ / Q) / (dP / P)
Unitary Elastic DemandEp = -1
Inelastic DemandEp = -1 < Ep <= 0
Elastic DemandEp < -1
Perfectly Inelastic DemandEp = 0 For any price change (no matter how large) quantity sold changed is zero.
Perfectly Elastic DemandEp = Infinity For any price change (no matter how small) quantity sold will be changed
Four Factors Affecting Price Elasticity1). Is the good a necessity? 2). Are there substitiutes? 3). Proportion of income spent? 4). Time of adjustment
Income ElasticityRatio of percent changes in slaes to changes in income Ey = (dQ /Q) / (dY / Y)
Cross-Price ElasticityRatio of changes in a good's sales and the prices of related goods Ep* = (dQ / Q) / (dP* / P*) Where P* = Price of related good or service
Arc Price ElasticityEp = (dQ / Qbar) / (dP/ Pbar) bar = average of the two values in question
Impact on Demand as a Function of Price and IncomedQ/Q = Ep*(dP/P) + Ey (dY/Y)
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