Chapter 2 Flashcards
what does the supply curve show?
how the quantity of a good offered for sale changes as the price of the good changes
what does the demand curve show?
how the quantity of a good demanded by consumers depends on its price
what are substitute goods?
two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other
what are complement goods?
two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other
what is meant by the term ‘equilibrium’?
price that equates the quantity supplied to the quantity demanded
what is meant by the term ‘market mechanism’?
tendency in a free market for price to change until the market clears
what is elasticity?
whenever two variables are causally related we are interested in how large is the effect of one on the other
what is the price elasticity of demand?
Percentage change in quantity demanded of a good resulting from a 1-percent increase in its price.
formula to calculate elasticity:
percentage change in quantity divided by the percentage change in price
what is meant by the term ‘completely inelastic demand’?
principle that consumers will buy a fixed quantity of a good regardless of its price
what is meant by the term ‘income elasticity of demand’?
percentage change in the quantity demanded resulting from a 1-percent increase in income
what is meant by the term ‘cross-price elasticity of demand’?
percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another
what is meant by the term ‘elasticities of supply’?
percentage change in quantity supplied resulting from a 1-percent increase in price
elasticity=
(slope) x price/quantity
