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96 Cards in this Set
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market demand
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the total quanitity purchsed by everyone at every price over some time period
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prestige good
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demanded in part because the price is high.
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market demand curve
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slopes downward towards the right. no vertical segments
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the absolute constraint on pricing by business forms
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charge a higher price and sell less
charger a lower price and sell more. |
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the law of demand is an absolute constraint on
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pricing by businesses
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businessmen set any price they want: in the sense that it is a free country
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true
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businessmen set any price that they want: in the sense "unconstrained by facts"
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false
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increase in demand =
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an increase in the quantity demanded at every price
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decrease in demand =
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a decrease in the quantity demanded at every price.
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changed in quantity demanded: when price changes
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demand does not change. quantity changes.
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changes in price
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do not effect demand.
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ceteris paribus: other than price and quantity, what changes demand
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income, tastes, prices of related products
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demand changes: income- normal goods
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direct relation between income and demand
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demand changes: income- inferior goods
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goods you buy with a low income until able to afford better. i.e. kids in college
inverse relation between income and demand. |
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demand changes: tastes
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all forms of individual prefernce.
rise in gas due to airbags in cars |
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substitute goods
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alternative ways of satisfying the same need. Goods for which there is a direct relation between the price of one good and the demand for another.
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buying food an exception to the law of demand?
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no one actually buys "food" as a whole. we buy specific products.
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economize=
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substitute cheaper sources of satisfaction.
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10% increase in wood. who would respond?
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industrial engineers, contruction builders, businessmen. would shift for substitutes.
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when would consumers respond to a rise in the cost of wood?
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wooden furniture would be more expensive relative to plastic or metal furniture. shift to less expensive furniture
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every does not have to buy less for law of demand to hold,
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just some people do.
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is water an exception to the law of demand?
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no; false
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water: used for other purposes than drinking. amount used depends on
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price.
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average capita daily use of water in chicago, new york and LA
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230- used to cool down steel
NY and LA= 150 |
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average capita daily use of water in SD and Boston
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120
110 |
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to reduce consumption of water: jawboning
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talking to people and trying ot persuade them to use less. Morally intimidate people to sacrifice
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to reduce consumption of water: pass laws
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use water police; force people to sacrifice because it covers everybody. gives no motive to save water except not to pay a fine.
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to reduce consumption of water: raise price
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law of demand in effect. nobodys as to sacrifice
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at higher prices, water
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is more worth saving, reduction of waste costs money.
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SAVING WATER IS
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NOT A SACRIFICE AT HIGHER PRICES.
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every does not have to buy less for law of demand to hold,
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just some people do.
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is water an exception to the law of demand?
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no; false
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water: used for other purposes than drinking. amount used depends on
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price.
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doubling of water prices would reduce
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household water consumption by about 30-50% in one year.
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Fall in the price of salt,
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would not increase use of household seasoning. would effect bigger things like salting roads in the winter.
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With the fall of the price of something,
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other uses for a product become more profitable, impossible for outsiders to predict.
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electricity in new york in households is used
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half as much when compared to other cities. it is twice as much in ny
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introspection
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focus of attention turned inward to your own mental processes
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a higher price makes you
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less inclined to buy and vice versa
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a higher price means you can
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buy less of other things.
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the law of demand is
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a law of markets. not a law of individual actions, but of large amounts of people
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standard of living=
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goods and services you use and enjoy
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considered objection to law of demand: when people go grocery shopping
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they do not look at the prices because they either know or think they know the prices. if the price has risen it wouldnt rise so much to not let them buy it.
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everyone looks at the prices of items
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when they dont know the price.
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3 alternatives to looking at prices on some items.
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1. look at price and buy
2. look at price, and put item back 3. look at price and pause, and consider. |
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margin of choice: enforces law of demand
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(edge of decision) if you buy, you would not hav bought at a slightly higher price. if you dont buy, you owuld have bought at a slightly lower price.
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margin of choice: some people in this position for every good
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makes the law of demand true. change in price changes what they do
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DIRECT EVIDENCE FOR AND CONFIRMATION OF THE LAW OF DEMAND
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PEOPLE ON THE MARGIN OF CHOICE
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direct evidence for law of demand:sales
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merchants dont advertise rises in prices. they advertise lower prices to increase quantity they sell
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direct evidence for law of demand: prices of fruit and vegs. when in season
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larger quanitities can only be sold at lower prices. no becuz transportation cost more.
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direct evidence for law of demand: more basic. low quality goods sell
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for lower prices than high quality goods.
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if there was no law of demand, price of low quality goods
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could be raised without reducing quantity sold, becuz quantity demanded would decrease.
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direct evidence for law of demand: prices
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the fundamental fact for law of demand.
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if prices could rise without reducing the
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quantity sold, profits rise without limit.
infinite prices= no prices |
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capacity=
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maximum amount that can be produced.
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the law of supply
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direct relation between price and quanitity supplied.
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change in technology:
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reduces costs. change in technology to produce new products is not considered in terms of supply.
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ceteris paribus: the costs of production
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prices of the factors of production and technological change.
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the supply curve
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slopes upward to the right.
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factors of production
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land, labor, capital
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prices rise and supply
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is not effected, defined over all prices
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the quantity produced at every price is
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is the profit maximizing quantity.
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market supply
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the quantity supplied at every price by every firm in the industry
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price elasticity of demand
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the responsiveness of the change in quantity demanded to change in a price.
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elasticity
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responsiveness of consumers to a change in price. the responsiveness of one variable to another. measured by change in quantity demanded.
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elastic demand
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more sensitive. big change in quantity demanded for give change in price. E>1
1% chagen in price causes more than 1% change in quantity |
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inelastic demand
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small change in quantity demanded for given change in price. E<1
1% change in price causes less than 1% change in quantity |
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the measurement for elasticity/inelasticity
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the percentage change in quantity demanded for a 1% change in price.
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elasticity equation
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change in Q/Q / change in P/P
pure number independant of units. |
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elastic measurement
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% change in quantity is greater than % change in price.
1% change in prices causes more than 1% change in quantity demanded numberator greater than denominator |
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inelastic measurement
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% change in quantity less than % change in price.
1% change in price causes less than 1% change in quantity demanded. numerator less than denominator |
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unitary elasticity measurement
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% change in quantity = % change in price.
1% change in price causes 1% change in quantity demanded numerator and denominator are equal. |
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total revenue equation
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TR = P x Q.
P and Q are inversely related |
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elasticity and total revenue: for any change in price, change in Q
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has oppositve effect on TR
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elastic demand. total revenue and prices.
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TR and P are inversely related.
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inelastic demand. total revenue and prices
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TR and P are directly related.
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Unitary elastic demand: changes in price causes
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no change in total revenue
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Unitary elastic demand: %change in P =
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% change in Q
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Unitary elastic demand: TR is unaffected
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by price changes
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more close substitutes for a product means
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great elasticity
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few close substitutes for a product means
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less elasticity
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in elasticity, closeness
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is more important than number
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one close substitute makes demand for a good
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elastic
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elasticity is greater for
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high cost goods than low cost goods
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larger percent budget means
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more elasticity
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smaller percent budget means
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less elasticity
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demand more elastic over
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longer periods of time
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very short run
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no enough time to produce anything. quantity supplied= the quantity being sold
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short run
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more can be produced, but not enough to change plant capacity. some factors and costs are fixed
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long run
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enough time to change plant capacity. no factors are fixed and no costs are fixed
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long run: constant cost industry
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different quantities are sold at the same price.
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long run: increasing cost industry
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as price increases, supply increases, and quantity increases
line slopes up and to the right. |
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long run: decrease in cost industry
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as price falls, supply falls, and quantity sold rises.
supply line goes down and to the right |
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primary determinant of elasticty is
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time
= greater elasticity |
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mr. white teeth toothbrushes
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assuming you could sell all you want to sell at that price.
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an material item with the highest amount of elasticity
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the one with the highest price.
ie. automobiles, furs, refrigerators |