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and a luxury (lobster). If IED is negative, then the good is inferior (instant
ramen noodles).
Price elasticity of supply: the responsiveness of the quantity supplied to a
change in price. % change in quantity supplied/ % change in price. Always
positive.
Determinants of the Price Elasticity of Supply: Depends on the ability and
willingness of firms to alter the quantity they produce as the price changes.
The supply curve will be inelastic if measured over a short period of time.
The supply curve will be elastic the longer the period of time over which we
measure it. Firms have difficult increasing the quantity they supply during
any short period of time. If supply is elastic, then the value of price elasticity
is greater than 1. If supply is inelastic, then the value of price elasticity is less
than 1. If supply is unit elastic, then the value of price elasticity is equal to 1.
If supply is perfectly elastic, then the value of price elasticity is infinite. If
supply is perfectly inelastic, then the value of price elasticity is equal to 0.
Chapter 10- Consumer Choice and Behavior Economics
Utility: The enjoyment or satisfaction people receive from consuming goods
and services. The higher the utility, the happier you are.
Marginal Utility: the chance in total utility a person receives from
consuming one additional unity of a good or service.
Law of Diminishing Marginal Utility: Consumers experience diminishing
additional satisfaction as they consume more of a good or service during a
given period of time.
Rational Behavior: Economic theory assumes that consumers behave
rationally. Rational consumers maximize their utility given their budget
constraint. In the real world, not all consumers behavior rationally.
Behavioral Economics: the study of situations in which people make
choices that do not appear to be economically rational. Three irrational
mistakes: consumers take into account monetary costs but ignore
nonmonetary opportunity costs, consumers fail to ignore sunk costs,
consumers are unrealistic about their future behavior.
Endowment effect: the tendency of people to be unwilling to sell a good
they already own even if they are offered a price that is greater than the price
they would be willing to pay the good if they didnt already own it. It implies
that peoples willingness to pay irrationally increases once they obtain the
item.
Sunk Cost: a cost that has already been paid and cannot be recovered.
Chapter 11- Technology, Production, and Costs
Labor: workers
Physical capital: factory/stores and machines
Short Run: the period of time during which at least one of a firms inputs is
fixed.
Long Run: the period of time in which a firm can vary all of its inputs, adopt
new technology, and increase or decrease the size of its physical plant.
Total Cost: The costs of all the inputs a firm uses in production.