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Chapter 3

Chapter 3 Vocab and Notes


Department
Business Administration
Course Code
BUS 207
Professor
Karen Ruckman
Chapter
3

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c
DETERMINANTS OF DEMAND

 The  shows, in equation form, the relationship between the quantity sold of a
good or service and one or more variables.
-?The demand equation can be used to test the effect of changes in any of the
explanatory variables.
 
 Starting from an initial price, by varying the price up or down, we move  respectively up
and down) the demand curve.
-?A higher price means lower sales and a lower price means higher sales.
 If there is a change in one of the other factors, then this mm.
^ 
 The m is a key determinant of demand.
-?Also important, is the m of the potential purchasers of the good or
service.
 A product is called a ^ if an increase in income raises its sales.
-?For any normal good, sales vary directly with income (the coefficient on income in
the demand equation is positive).
-?Most goods and services are normal (any increase in consumer income is spread over
a wide variety of goods and services).
 For j ^, an increase in income causes a reduction in spending.
 A third set of factors affecting demand are the prices of  and mgoods.
 A !^ competes with and can substitute for the good in question.
-?An increase in the price of the substitute good or service causes an increase in
demand for the good in question.
 A pair of goods is  if an increase in demand for one causes an increase in
demand for the other.
-?An increase in the price of a complementary good reduces demand for the good in
question.
 A wide variety of other factors may affect the demand for particular goods and services:
-?Normal  growth of prime groups that consume the good or service will
increase demand.
-?ahanges in preferences and tastes are another important factor.

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ELASTIaITY OF DEMAND

measures the responsiveness of a good¶s sales to changes in its price.
-?ènowledge of a good¶s price elasticity allows firms to predict the impact of price
changes on unit sales.
-?Price elasticity guides the firm¶s profit-maximizing pricing decisions.
 The   is the ratio of the percentage change in quantity and the
percentage change in the good¶s price, all other factors held constant.
-?EP = % ahange in Q/% ahange in P.
-?££ ££.
 Elasticity is written as:
-?££ or ££.
-?Elasticity depends directly on the derivative of the demand function with respect to P.
-?The equations are referred to as mbecause they link percentage
quantity and price changes mm.
m price elasticity is defined as:
-?££.
?Q is the average of the two quantities Q = (Q0 + Q1)/2 and P is the average of
the two prices, P = (P0 + P1)/2.
-?The main advantage of the arc elasticity measure is that it treats the prices and
quantities symmetrically (it does not distinguish between the  and  prices
and quantities).
 Elasticity measures the sensitivity of demand with respect to price.
 Demand is said to be * if .
-?The percentage change in price is exactly matched by the resulting percentage change
in quantity but in the opposite direction.
 Demand is  if ".
-?An initial change in price causes a larger percentage change in quantity.
 Demand is  j if .
-?For any price change, the quantity change is zero and therefore so is the elasticity.
 Demand is   if #.
-?The firm can sell as much output as it likes at the given price because whether it sells
a large or small output quantity will have no effect on its price.
-?The  determines the firm¶s price.
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