Elasticity of Demand and Supply

Flashcards covering key vocabulary related to the elasticity of demand and supply from the lecture notes.

Price Elasticity of Demand

Measures buyers’ responsiveness to price changes.

Elastic Demand

Buyer sensitivity to price changes, resulting in a large change in quantity demanded. Ed > 1.

Inelastic Demand

Buyer insensitivity to price changes, resulting in a small change in quantity demanded. Ed < 1.

Price Elasticity of Demand Formula

Percentage change in quantity demanded of product X divided by the percentage change in price of product X.

Midpoint Formula for Price Elasticity of Demand

Ed = \frac{\text{Change in Quantity} / ((\text{Quantity}1 + \text{Quantity}2)/2)}{\text{Change in Price} / ((\text{Price}1 + \text{Price}2)/2)} or in simplified form: Ed = \frac{(Q2 - Q1) / ((Q1 + Q2)/2)}{(P2 - P1) / ((P1 + P2)/2)}

Unit Elastic Demand

When the percentage change in quantity demanded equals the percentage change in price, so Ed = 1.

Perfectly Inelastic Demand

An extreme case where quantity demanded does not change at all with a price change. Ed = 0.

Perfectly Elastic Demand

An extreme case where a small price change leads to an infinitely large change in quantity demanded. Ed = \infty.

Total Revenue Test

A method to determine elasticity by observing how total revenue (Price × Quantity) changes in response to a price change. For inelastic demand, P and TR move in the same direction; for elastic demand, P and TR move in opposite directions.

Total Revenue

The total amount of money received by a firm from the sale of a good or service, calculated as Price multiplied by Quantity.

Substitutability (Determinant of Ed)

The more substitutes available for a good, the more elastic its demand.

Proportion of Income (Determinant of Ed)

Goods that represent a higher proportion of a buyer's income tend to have more elastic demand.

Luxuries versus Necessities (Determinant of Ed)

Luxury goods typically have more elastic demand than necessities.

Time (Determinant of Ed)

Demand for a good tends to be more elastic the more time consumers have to adjust to a price change.

Price Elasticity of Supply

Measures sellers’ responsiveness to price changes.

Elastic Supply

Producers are responsive to price changes, resulting in a large change in quantity supplied. Es > 1.

Inelastic Supply

Producers are not responsive to price changes, resulting in a small change in quantity supplied. Es < 1.

Price Elasticity of Supply Formula

Percentage change in quantity supplied of product X divided by the percentage change in price of product X.

Time (Determinant of Es)

The primary determinant of elasticity of supply; supply becomes more elastic over longer time periods.

Market Period

A time period where producers cannot change the quantity of output in response to price changes, resulting in perfectly inelastic supply.

Short Run (Elasticity of Supply)

A time period during which producers can change some inputs but not all, making supply more elastic than in the market period but still relatively inelastic.

Long Run (Elasticity of Supply)

A time period long enough for producers to change all inputs, allowing for substantial adjustment to price changes, resulting in highly elastic supply.

Income Elasticity of Demand

Measures buyers’ responsiveness to changes in income.

Income Elasticity of Demand Formula

Percentage change in quantity demanded divided by the percentage change in income. EI = \frac{\% \Delta Qd}{\% \Delta I}

Normal Goods (Income Elasticity)

Goods for which income elasticity of demand is positive; demand increases as income rises.

Inferior Goods (Income Elasticity)

Goods for which income elasticity of demand is negative; demand decreases as income rises.

Cross-Elasticity of Demand

Measures responsiveness of sales of one good to a change in the price of another good.

Cross-Elasticity of Demand Formula

Percentage change in quantity demanded of product X divided by the percentage change in price of product.