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Flashcards in Economics 2 Deck (15):

How does revenue react to price under Inelastic Demand?

Price increases- Revenue increases

Price decreases- Revenue decreases


What conditions would indicate Inelastic Demand?

Few substitutes (groceries- gasoline)
Considered inelastic if coefficient of elasticity is less than 1
5% drop in demand / 10% increase in price : .5 (inelastic)

Price increases- Revenue increases
Price decreases- Revenue decreases


What is Unitary Demand?

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1


How is Income Elasticity of Demand calculated?

% Change Quantity Demanded / % Change in Income

Normal goods greater than 1 (demand increases more than income)

Inferior goods less than 1 (demand increases less than income)


What conditions occur under periods of inflation?

Interest rates increase
Reduced demand for loans
Reduced demand for houses- autos- etc.
Value of bonds and fixed income securities decrease
Inferior good demand to increase
Foreign goods more affordable than domestic
Demand for domestic goods decrease


What happens under Demand-Pull inflation?

Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases


What happens under Cost-Push inflation?

Overall production costs increase
Supply decreases (shifts left)
Market equilibrium price increases

Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase


What is the Equilibrium Price?

The price where Quantity Supplied : Quantity Demanded


What is Optimal Production?

When Marginal Revenue : Marginal Cost


What is the result of a Price Floor?

Causes a surplus if above equilibrium price.


What is GDP (Gross Domestic Product)?

The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests

Included: Foreign company has US Factory

Not included: US company has foreign factory


What is included under the income approach for calculating GDP?

Sole Proprietor and Corp Income
Passive Income
Employee Salaries
Foreign Income Adjustments


What is included under the Expenditure Approach for calculating GDP?

Individual Consumption

Private Investment

Government Purchases

Net Exports


What is Nominal GDP?

Measures goods/services in current prices.


For what is a GDP Deflator used?

Used to convert GDP to Real GDP