Elasticity idea flashcards

What is elasticity?

Elasticity measures how quantity demanded or supplied responds to price changes.

Price Elasticity of Demand (PED)

PED calculates the responsiveness of quantity demanded to a price change. Formula: $\displaystyle PED = \\frac{\% \Delta Q_d}{\% \Delta P}$.

Inelastic Demand

Inelastic demand means quantity demanded changes less than price. PED < 1.

Elastic Demand

Elastic demand means quantity demanded changes more than price. PED > 1.

Unit Elastic Demand

Unit elastic demand occurs when quantity demanded changes exactly as price. PED = 1.

True or False: Elasticity is constant along a demand curve.

False, because elasticity varies along the curve.

Cross Price Elasticity

Measures how the quantity demanded of one good responds to price changes of another good. Formula: $\displaystyle CPE = \\frac{\% \Delta Q_d (Good A)}{\% \Delta P (Good B)}$.

Substitutes vs Complements

Substitutes have positive cross elasticity; complements have negative cross elasticity.

Factors affecting price elasticity

1. Availability of substitutes 2. Necessity vs luxury 3. Time period 4. Definition of market

Income Elasticity of Demand

Measures how quantity demanded responds to income changes. Formula: $\displaystyle YED = \\frac{\% \Delta Q_d}{\% \Delta Y}$.

Normal Goods

Normal goods have positive income elasticity; demand increases as income rises.

Inferior Goods

Inferior goods have negative income elasticity; demand decreases as income rises.

True or False: Perfectly inelastic demand has a slope of zero.

False, because perfectly inelastic demand is a vertical line.

Difference between elastic and inelastic

Elastic demand changes significantly with price changes; inelastic doesn't.

Total Revenue and Elasticity

If demand is elastic, increasing price decreases total revenue. If inelastic, it increases total revenue.

True or False: Elasticity is a measure of sensitivity.

True, because it shows how sensitive quantity is to price changes.

Fill in the blank: The more substitutes available, the more __________ the demand.

elastic.

What is perfectly elastic demand?

Perfectly elastic demand means quantity demanded changes infinitely with price changes. Graph is horizontal.