Test 2 - Definitions

Question 1

Constant unitary elasticity

Answer 1

when a given percent change in price leads to an equal percentage change in quantity demanded or supplied

Question 2

Cross-price elasticity of demand

Answer 2

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

Question 3

Elastic demand

Answer 3

when the elasticity of demand is greater than 1, indicating a high responsiveness of quantity demanded or supplied to changes in price

Question 4

Elastic supply

Answer 4

when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

Question 5

Elasticity

Answer 5

economic concept that measures responsiveness of one variable changes in another variable

Question 6

Elasticity of savings

Answer 6

the percentage change in the quantity of savings divided by the percentage change in interest rates

Question 7

Inelastic demand

Answer 7

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

Question 8

Inelastic supply

Answer 8

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)

Question 9

Infinite/perfect elasticity

Answer 9

extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance

Question 10

Zero/perfect inelasticity

Answer 10

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

Question 11

Price elasticity

Answer 11

relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied

Question 12

Price elasticity of demand

Answer 12

percentage change in the quantity demanded of a good/service divided by the percentage change in price

Question 13

Price elasticity of supply

Answer 13

percentage change in the quantity supplied divided by the percentage change in price

Question 14

Tax incidence

Answer 14

manner in which the tax burden is divided between buyers and sellers

Question 15

Unitary elasticity

Answer 15

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

Question 16

Wage elasticity of labor supply

Answer 16

percentage change in hours worked divided by the percentage change in wages

Question 17

Budget constraint/line

Answer 17

shows the possible combinations of two goods that are affordable given a consumer’s limited income

Question 18

Consumer equilibrium

Answer 18

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

Question 19

Diminishing marginal utility

Answer 19

the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit

Question 20

Fungible

Answer 20

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

Question 21

Income effect

Answer 21

higher price means that the buying power of income has reduced, despite income not changing. Always happens simultaneously with a substitution effect

Question 22

Marginal utility

Answer 22

the additional utility provided by 1 more unit of consumption

Question 23

Marginal utility per dollar

Answer 23

additional utility gained from purchasing a good given the price of the product; MU/price

Question 24

Substitution effect

Answer 24

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

Question 25

Total utility

Answer 25

satisfaction derived from consumer choices

Question 26

Actual rate of return

Answer 26

total rate of return, including capital gains and interest paid on an investment at the end of a time period

Question 27

Bond

Answer 27

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

Question 28

Bond yield

Answer 28

rate of return a bond is expected to pay at the time of purchase

Question 29

Capital gain

Answer 29

a financial gain from buying an asset (e.g. stock share or house) and later selling it at a higher price

Question 30

Certificate of deposit (CD)

Answer 30

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

Question 31

Compound interest

Answer 31

interest rate calculation on the principal plus the accumulated interest

Question 32

Corporate bond

Answer 32

bond issued by firms that wish to borrow

Question 33

Corporate governance

Answer 33

institutions that are supposed to watch over top executives in companies that shareholders own

Question 34

Coupon rate

Answer 34

interest rate paid on a bond; can be annual or semi-annual

Question 35

Dividend

Answer 35

direct payment from a firm to its shareholders

Question 36

Equity

Answer 36

monetary value a homeowner would have after selling the house and repaying any outstanding bank loans

Question 37

Index fund

Answer 37

mutual fund that seeks only to mimic the market's overall performance

Question 38

Initial public offering (IPO)

Answer 38

first sale of shares of stock by a firm to outside investors

Question 39

Municipal bonds

Answer 39

bond issued by cities that wish to borrow

Question 40

Mutual funds

Answer 40

funds that buy a range of stocks/bonds from different companies, allowing investors an easy way to diversify

Question 41

Partnership

Answer 41

company run by a group rather than an individual

Question 42

Private company

Answer 42

Firm frequently owned by the people who generally run it on a day-to-day basis

Question 43

Public company

Answer 43

firm that has sold stock to the public

Question 44

Sole proprietorship

Answer 44

company run by an individual as opposed to a group

Question 45

Stock

Answer 45

a specific firm's claim on partial ownership

Question 46

Treasury bond

Answer 46

bond issued by federal gov. through the U.S. Dept. of the Treasury

Question 47

Venture capital

Answer 47

financial investments in new companies that are still relatively small in size but have potential to grow substantially

Question 48

Total revenue

Answer 48

price x quantity