Reading 8 - Demand and Supply Analysis - Custom Scholars
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# Reading 8 – Demand and Supply Analysis

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Own Price Elasticity
a measure of the responsiveness of quantity demanded to a change in price
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cross price elasticity
a measure of how much the quantity demanded of one good responds to a change in the price of another good
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elastic good
|own-price elasticity| > 1
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inelastic good
|own-price elasticity| < 1
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substitute good
cross-price elasticity > 0
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complement good
cross-price elasticity < 0
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inferior good
income elasticity < 0
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normal good
income elasticity > 0
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substitution effect
When the price of a good decreases, the ______ leads a consumer to consume more of that good and less of goods for which prices have remained the same.
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income effect
A decrease in the price of a good that a consumer purchases leaves her with unspent income (for the same combination of goods). The effect of this additional income on consumption of the good for which the price has decreased is termed the:
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normal good
the income effect of a price decrease is positive—income elasticity of demand is positive.
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inferior good
the income effect of a price decrease is negative—income elasticity of demand is negative. An increase in income reduces demand for an:
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Giffon good
an inferior good for which the negative income effect of a price decrease outweighs the positive substitution effect, so that a decrease (increase) in the good's price has a net result of decreasing (increasing) the quantity consumed.
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Veblen Good

s also one for which an increase (decrease) in price results in an increase (decrease) in the quantity consumed. However, is not an inferior good and is not supported by the axioms of the theory of demand.

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Marginal returns
the additional output that can be produced by using one more unit of a productive input while holding the quantities of other inputs constant.
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breakeven quantity (perfect competition)
is the quantity for which price (P) = average total cost (ATC) and total revenue (TR) = total cost (TC).
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long run (perfect competition)
The firm should shut down in the _____ if P < ATC so that TR < TC.
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short run (perfect competition)
The firm should shut down in the ______ (and the long run) if P < average variable cost (AVC) so that TR < total variable cost (TVC).
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breakeven quantity (imperfect competition)
is the quantity for which TR = TC.
question
long run (imperfect competition)
if TR < TC.
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short run (imperfect competition)
if TR < TVC.
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long-run average total cost (LRATC)
shows the minimum average total cost for each level of output assuming that the plant size (scale of the firm) can be adjusted.
question
economies of scale
downward-sloping segment of an LRATC curve (increasing returns to scale) Over such a segment, increasing the scale of the firm reduces ATC
question
diseconomies of scale
An upward-sloping segment of an LRATC curve, where average unit costs will rise as the scale of the business (and long-run output) increases
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question
Own Price Elasticity
a measure of the responsiveness of quantity demanded to a change in price
question
cross price elasticity
a measure of how much the quantity demanded of one good responds to a change in the price of another good
question
elastic good
|own-price elasticity| > 1
question
inelastic good
|own-price elasticity| < 1
question
substitute good
cross-price elasticity > 0
question
complement good
cross-price elasticity < 0
question
inferior good
income elasticity < 0
question
normal good
income elasticity > 0
question
substitution effect
When the price of a good decreases, the ______ leads a consumer to consume more of that good and less of goods for which prices have remained the same.
question
income effect
A decrease in the price of a good that a consumer purchases leaves her with unspent income (for the same combination of goods). The effect of this additional income on consumption of the good for which the price has decreased is termed the:
question
normal good
the income effect of a price decrease is positive—income elasticity of demand is positive.
question
inferior good
the income effect of a price decrease is negative—income elasticity of demand is negative. An increase in income reduces demand for an:
question
Giffon good
an inferior good for which the negative income effect of a price decrease outweighs the positive substitution effect, so that a decrease (increase) in the good's price has a net result of decreasing (increasing) the quantity consumed.
question
Veblen Good

s also one for which an increase (decrease) in price results in an increase (decrease) in the quantity consumed. However, is not an inferior good and is not supported by the axioms of the theory of demand.

question
Marginal returns
the additional output that can be produced by using one more unit of a productive input while holding the quantities of other inputs constant.
question
breakeven quantity (perfect competition)
is the quantity for which price (P) = average total cost (ATC) and total revenue (TR) = total cost (TC).
question
long run (perfect competition)
The firm should shut down in the _____ if P < ATC so that TR < TC.
question
short run (perfect competition)
The firm should shut down in the ______ (and the long run) if P < average variable cost (AVC) so that TR < total variable cost (TVC).
question
breakeven quantity (imperfect competition)
is the quantity for which TR = TC.
question
long run (imperfect competition)
if TR < TC.
question
short run (imperfect competition)
if TR < TVC.
question
long-run average total cost (LRATC)
shows the minimum average total cost for each level of output assuming that the plant size (scale of the firm) can be adjusted.
question
economies of scale
downward-sloping segment of an LRATC curve (increasing returns to scale) Over such a segment, increasing the scale of the firm reduces ATC
question
diseconomies of scale
An upward-sloping segment of an LRATC curve, where average unit costs will rise as the scale of the business (and long-run output) increases

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