AP Micro elasticity study guide

What is price elasticity of demand?

A measure of how much the quantity demanded of a good responds to a change in price. Formula: $\displaystyle E_d = \\frac{\%\Delta Q_d}{\%\Delta P}$.

Formula for price elasticity of demand

$\displaystyle E_d = \\frac{\Delta Q_d / Q_d}{\Delta P / P} = \\frac{P}{Q} \times \\frac{\Delta Q_d}{\Delta P}$

True or false: Elastic demand means consumers are insensitive to price changes.

False, because elastic demand indicates consumers are sensitive to price changes.

Difference between elastic and inelastic demand

Elastic demand: $\displaystyle E_d > 1$; Inelastic demand: $\displaystyle E_d < 1$. Elasticity affects total revenue in opposite ways.

What is unitary elasticity?

Unitary elasticity occurs when the percentage change in quantity demanded equals the percentage change in price. $\displaystyle E_d = 1$.

What factors affect elasticity of demand?

- Availability of substitutes - Necessity vs luxury - Time period - Proportion of income spent

Cross elasticity of demand

Measures the responsiveness of quantity demanded for one good to the price change of another good. Formula: $\displaystyle E_{xy} = \\frac{\%\Delta Q_x}{\%\Delta P_y}$.

True or false: Perfectly inelastic demand has an elasticity of zero.

True, because perfectly inelastic demand means quantity demanded does not change regardless of price.

What is income elasticity of demand?

Measures how much the quantity demanded changes in response to a change in consumer income. Formula: $\displaystyle E_i = \\frac{\%\Delta Q_d}{\%\Delta I}$.

Difference between normal and inferior goods

Normal goods have positive income elasticity ($\displaystyle E_i > 0$); inferior goods have negative income elasticity ($\displaystyle E_i < 0$).

What is elasticity of supply?

Measures how much the quantity supplied responds to a change in price. Formula: $\displaystyle E_s = \\frac{\%\Delta Q_s}{\%\Delta P}$.

Fill in the blank: If demand is elastic, an increase in price will ______ total revenue.

decrease total revenue.

What happens to total revenue when demand is inelastic and price increases?

Total revenue increases because the percentage drop in quantity demanded is less than the percentage increase in price.

True or false: The demand curve for perfectly elastic demand is vertical.

False, because perfectly elastic demand is horizontal.

What is the significance of elasticity in economics?

Elasticity informs pricing strategies, tax incidence, and consumer behavior, impacting market equilibrium.

Difference between short-run and long-run elasticity of supply

Short-run elasticity is typically lower due to fixed resources; long-run elasticity is higher as firms can adjust fully.