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price of elasticity of demand
a measure of the responsiveness of the quantity demanded to changes in price
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elastic demand
the price elasticity of demand is greater than one, so the percentage change in quantity exceeds the percentage change in price
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inelastic demand
the price elasticity of demand is less than one so the percentage change in quantity equals the percentage change in price
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unit elastic demand
the price elasticity of demand is one, so the percentage change in quantity equals the percentage change in price
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perfectly inelastic demand
the price elasticity of demand is zero
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formula for the Price Elasticity of Demand (Ed)
Ed= |% change in quantity demanded ÷ % change in price|
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total revenue
the money a firm generates from selling its product
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income elasticity of demand
a measure of the responsiveness of demand to changes in consumer income
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formula for Income Elasticity of Demand (Et)
Et= % change in quantity demanded ÷ % change in income
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cross-price elasticity of demand
a measure of the responsiveness of demand to changes in the price of another good
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formula for Cross-Price Elasticity of Demand (Exy)
Exy= % change in quanitity of X demanded ÷ % change in price Y
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price elasticity of supply
a measure of the responsiveness of the quantity supplied to changes in price
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formula for Price Elasticity of Supply (Es)
Es= % change in quantitiy supplied ÷ % change in price
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perfectly inelastic supply
the price elasticity of supply equals 0
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perfectly elastic supply
the price elasticity of supply is equal to ∞
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Utility
the satisfaction experienced from consuming a good
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marginal utility
the change in total utility from one additional unit of a good
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law of diminishing marginal utility
as the consumption of a particular good increases, marginal utility decreases.
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budget line
the line connecting all the combinations of two goods that exhaust a consumer's budget
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budget set
a set of points that includes all the combinations of two goods that a consumer can afford, given the consumer's income and the prices of the goods
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equimarginal rule
pick the combinations of two activites where the marginal benefit per dollar for the first activity equals the marginal benefit per dollar for the second activity
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substitution effect
the chnage in quantity consumed that is caused by a change in the relative priece of the good, with real income held constant
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income effect
the change in quantity consumed that is caused by a change in real income, with relative prices held contant
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economic profit
total revenue minus economic cost
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economic cost
the opportunity cost of thte inputs used in the production process, equal to explicit cost plus implicit cost
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explicit cost
a monetary payment
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implicit cost
an opportunity cost that does not involve a monetary payment
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accounting cost
the explicit cost of production
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accounting profit
total revenue minus accounting cost
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marginal product of labor
the change in output from one additional unit of labor
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diminishing returns
as one input increases while the other inputs are held fixed, ouput increases at a decreasing rate
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total-product curve
a curve showing the relationship between the quantity of labor and the quantity of output produced, ceteris paribus
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Fixed cost (FC)
cost that does no vary with the quantity produced
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variable cost (VC)
cost that varies with the quantity produced
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Short-run total cost (TC)
the total cost of production when at least one input is fixed; equal to fixed cost plus variable cost
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average fixed cost (AFC)
fixed cost divided by the quantity produced
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average variable cost (AVC)
variable cost divided by the quantity produced
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Short-run average total cost (ATC)
short-run total cost divided by the quantity produced; equal to AFC plus AVC
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Short-run marginal cost (MC)
the change in short-run total cost resulting from a one unit increase in output
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long-run total cost (LTC)
the total cost of production when a firm is perfectly flexible in choosing its inputs
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long-run average cost (LAC)
the long-run cost divided by the quantity produced
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constant returns to scale
a situation in which the long-run total cost increases proportionately with output, so average cost is constant
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long-run marginal cost (LMC)
the change in long-run cost resulting from a one-unit increase in output
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indivisible input
an input that cannot be scaled down to produce a smaller quantity of output
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economies of scale
a situation in which the long-run average cost of production decreases as output increases
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minimum efficient scale
the ouput at which scale economies are exhausted
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diseconomies of scale
a situation in which the long-run average cost of production increases as output increases
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perfectly competetive market
a market with many sellers and buyers of a homogeneous product and no barriers to entry
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price taker
a buyer or seller that takes the market price as given
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firm-specific demand curve
a curve showing the relationship between the price charged by a specific firm and the quantity the firm can sell
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break-even price
the price at which economic profit is zero; price equals average total cost
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shut-down price
the price at which the firm is indifferent between operating and shutting down; equal to the minimum average variable cost
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sunk cost
a cost that a firm has already paid or committed to pay, so it cannot be recovered
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short-run supply curve
a curve showing the relationship bwtween the market price of a product and the quantity of output supplied by a firm in the short run
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short-run market supply curve
a curve showing the relationship between the market price and quantity supplied in the short run
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long-run market supply curve
a curve showing the relationship between the market price and quantity supplied in the long run
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increasing-cost industry
an industry in which the averge cost of production increases as the total ouput of the industry increases; the long-run supply is positively sloped
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constant-cost industry
an industry in which the average cost of production is constant; the long-run supply curve is horizontal
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