Microeconomics: Chapter 6 - Elasticity: The Responsiveness of Demand and Supply

Vocabulary practice flashcards covering fundamental concepts, formulas, and classifications of price elasticity of demand, total revenue, cross-price elasticity, income elasticity, and price elasticity of supply.

Elasticity

A measure of how much one economic variable responds to changes in another economic variable, based on percentage changes in the variables.

Price Elasticity of Demand

The responsiveness of the quantity demanded of a good to a change in its price, calculated as the percentage change in quantity demanded divided by the percentage change in price.

Elastic Demand

Demand for which the percentage change in quantity demanded is greater than the percentage change in price, resulting in an absolute value of price elasticity of demand greater than $1$.

Inelastic Demand

Demand for which the percentage change in quantity demanded is smaller than the percentage change in price, resulting in an absolute value of price elasticity of demand less than $1$.

Unit-Elastic Demand

Demand for which a given percentage change in price leads to an equal percentage change in quantity demanded, resulting in an absolute value of price elasticity of demand equal to $1$.

Midpoint Formula

A formula used to calculate percentage changes that avoids direction dependency by dividing the change in value by the average of the initial and final values: $\frac{A - B}{(A + B)/2}$.

Perfectly Inelastic Demand

The case where quantity demanded is completely unresponsive to price changes, resulting in a vertical demand curve and a price elasticity of demand equal to $0$.

Perfectly Elastic Demand

The case where quantity demanded is infinitely responsive to price changes, resulting in a horizontal demand curve and a price elasticity of demand equal to $\infty$.

Total Revenue

The total amount of funds a seller receives from selling a good or service, calculated as the price per unit multiplied by the number of units sold ($P \times Q$).

Cross-Price Elasticity of Demand

The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good, which measures the strength of substitute or complement relationships.

Substitutes (in Cross-Price Elasticity)

Goods and services that can be used for the same purpose, characterized by a positive cross-price elasticity of demand.

Complements (in Cross-Price Elasticity)

Goods and services that are used together, characterized by a negative cross-price elasticity of demand.

Income Elasticity of Demand

A measure of the responsiveness of the quantity demanded to changes in consumer income, calculated as the percentage change in quantity demanded divided by the percentage change in income.

Normal Good (Necessity)

A good for which quantity demanded increases as income increases, characterized by an income elasticity of demand that is positive but less than $1$.

Normal Good (Luxury)

A good for which quantity demanded increases significantly as income increases, characterized by an income elasticity of demand that is positive and greater than $1$.

Inferior Good

A good for which the quantity demanded decreases as consumer income increases, characterized by a negative income elasticity of demand.

Price Elasticity of Supply

The responsiveness of the quantity supplied of a good to a change in its price, measured by dividing the percentage change in quantity supplied by the percentage change in price.

Perfectly Inelastic Supply

The case where quantity supplied is completely unresponsive to price changes, represented by a vertical supply curve and a price elasticity of supply equal to $0$.

Perfectly Elastic Supply

The case where quantity supplied is infinitely responsive to price changes, represented by a horizontal supply curve and a price elasticity of supply equal to $\infty$.