Test 2 - Definitions Flashcards
Constant unitary elasticity
when a given percent change in price leads to an equal percentage change in quantity demanded or supplied
Cross-price elasticity of demand
the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B
Elastic demand
when the elasticity of demand is greater than 1, indicating a high responsiveness of quantity demanded or supplied to changes in price
Elastic supply
when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
Elasticity
economic concept that measures responsiveness of one variable changes in another variable
Elasticity of savings
the percentage change in the quantity of savings divided by the percentage change in interest rates
Inelastic demand
when the elasticity of demand is less than one, indicating that a 1% increase in price paid by consumer leads to less than 1% change in purchases (and vice versa). Indicates a low responsiveness by consumers to price changes
Inelastic supply
when the elasticity of supply is less than 1, indicating that a 1% increase in price paid to firm will result in a less than 1% increase in production by the firm. Indicates low responsiveness of the firm to price increases (and vice versa if price drops)
Infinite/perfect elasticity
extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance
Zero/perfect inelasticity
highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance
Price elasticity
relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied
Price elasticity of demand
percentage change in the quantity demanded of a good/service divided by the percentage change in price
Price elasticity of supply
percentage change in the quantity supplied divided by the percentage change in price
Tax incidence
manner in which the tax burden is divided between buyers and sellers
Unitary elasticity
when the calculated elasticity is equal to one, indicating that a change in the price of the good/service results in a proportional change in the quantity demanded or supplied
Wage elasticity of labor supply
percentage change in hours worked divided by the percentage change in wages
Budget constraint/line
shows the possible combinations of two goods that are affordable given a consumer’s limited income
Consumer equilibrium
point on the budget line where the consumer gets the most satisfaction- this occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities
Diminishing marginal utility
the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit
Fungible
units of a good (eg dollars, gold bars, barrels of oil) are capable of mutual substitution with each other and carry equal value to the individual
Income effect
higher price means that the buying power of income has reduced, despite income not changing. Always happens simultaneously with a substitution effect
Marginal utility
the additional utility provided by 1 more unit of consumption
Marginal utility per dollar
additional utility gained from purchasing a good given the price of the product; MU/price
Substitution effect
when a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect
Total utility
satisfaction derived from consumer choices
Actual rate of return
total rate of return, including capital gains and interest paid on an investment at the end of a time period
Bond
a financial contact through which a borrower (e.g. corporation, city, state, or federal gov) agrees to repay the amount that it borrowed PLUS a rate of interest over a period of time in the future
Bond yield
rate of return a bond is expected to pay at the time of purchase
Capital gain
a financial gain from buying an asset (e.g. stock share or house) and later selling it at a higher price
Certificate of deposit (CD)
mechanism for a saver to deposit funds at a bank and promise to leave them at the bank for a time, in exchange for a higher interest rate
Compound interest
interest rate calculation on the principal plus the accumulated interest
Corporate bond
bond issued by firms that wish to borrow
Corporate governance
institutions that are supposed to watch over top executives in companies that shareholders own
Coupon rate
interest rate paid on a bond; can be annual or semi-annual
Dividend
direct payment from a firm to its shareholders
Equity
monetary value a homeowner would have after selling the house and repaying any outstanding bank loans
Index fund
mutual fund that seeks only to mimic the market’s overall performance
Initial public offering (IPO)
first sale of shares of stock by a firm to outside investors
Municipal bonds
bond issued by cities that wish to borrow
Mutual funds
funds that buy a range of stocks/bonds from different companies, allowing investors an easy way to diversify
Partnership
company run by a group rather than an individual
Private company
Firm frequently owned by the people who generally run it on a day-to-day basis
Public company
firm that has sold stock to the public
Sole proprietorship
company run by an individual as opposed to a group
Stock
a specific firm’s claim on partial ownership
Treasury bond
bond issued by federal gov. through the U.S. Dept. of the Treasury
Venture capital
financial investments in new companies that are still relatively small in size but have potential to grow substantially
Total revenue
price x quantity
