Chapter 5: Elasticity & Its Application

A series of flashcards based on the lecture notes covering key concepts related to elasticity in economics.

What does elasticity measure in economics?

Elasticity measures the responsiveness of one variable to changes in another variable.

What is Price Elasticity of Demand (PED)?

Price Elasticity of Demand measures how much the quantity demanded of a good responds to a change in its price.

What is the formula for calculating Price Elasticity of Demand (PED)?

PED = % Change in Quantity Demanded / % Change in Price.

What does a PED value greater than 1 indicate?

It indicates that demand is very responsive (elastic) to price changes.

What does a PED value less than 1 indicate?

It indicates that demand is not very responsive (inelastic) to price changes.

What is a unit elastic demand?

Unit elastic demand occurs when quantity changes by the same percentage as price.

What are the determinants of Price Elasticity of Demand?

The availability of substitutes, necessity vs luxury status, definition of the market, time horizon, and share of budget.

How does the availability of substitutes affect demand elasticity?

More substitutes available make demand more elastic.

What happens to total revenue when price changes for elastic demand?

Total revenue moves in the opposite direction of price changes.

What is the definition of Income Elasticity of Demand?

Income Elasticity of Demand measures how the quantity demanded for a good changes as consumer income changes.

What does an income elasticity greater than 0 indicate?

It indicates that the good is a normal good, as demand increases with income.

What is the definition of Price Elasticity of Supply (PES)?

Price Elasticity of Supply measures how much the quantity supplied of a good responds to a change in its price.

What characteristics lead to elastic supply?

Producers can easily adjust production, often based on time horizon and flexibility of inputs.

What is the relationship between elasticity and total revenue?

If demand is elastic, total revenue increases when price decreases and vice versa; if inelastic, total revenue moves in the same direction as price changes.

What do perfectly elastic and perfectly inelastic supply curves look like?

Perfectly elastic supply is a horizontal line (E=∞) and perfectly inelastic supply is a vertical line (E=0).

What is a real-world example of inelastic demand?

Cigarettes are an example of inelastic demand due to addiction and few substitutes.

How does elasticity change in the short-run vs. long-run?

In the short-run, both demand and supply are more inelastic; in the long-run, they become more elastic as consumers and firms adjust behaviors.

What common misunderstanding exists about elasticity and slope?

Elasticity is about responsiveness, not just the slope of the curve; flatter curves are generally more elastic.