Elasticity – Key Vocabulary

50 vocabulary flashcards summarizing key elasticity definitions, classifications, determinants, and examples from the lecture notes.

Elasticity (economic concept)

General technique for estimating the responsiveness of one variable to changes in another.

Price Elasticity of Demand (Ed)

Measures the responsiveness of quantity demanded to a change in price.

Midpoint Formula

Method for calculating Ed that uses the averages of two prices and two quantities to avoid direction bias.

Elastic Demand

Situation where Ed > 1; percentage change in quantity demanded exceeds the percentage change in price.

Inelastic Demand

Situation where Ed < 1; percentage change in quantity demanded is less than the percentage change in price.

Unit Elastic Demand

Condition where Ed = 1; percentage change in quantity demanded equals percentage change in price.

Perfectly Elastic Demand

Ed = ∞; even a tiny price change causes quantity demanded to drop to zero or rise to infinity.

Perfectly Inelastic Demand

Ed = 0; quantity demanded remains unchanged regardless of price changes.

Law of Demand

States that, ceteris paribus, quantity demanded falls when price rises and rises when price falls.

Total Revenue (TR)

Price of a good multiplied by the quantity sold (P × Q).

TR & Elastic Demand

When demand is elastic, price and total revenue move in opposite directions.

TR & Inelastic Demand

When demand is inelastic, price and total revenue move in the same direction.

TR & Unit Elastic Demand

With unit elasticity, changes in price leave total revenue unchanged.

Number of Substitutes

More substitutes make demand more elastic; fewer substitutes make it less elastic.

Necessity vs. Luxury

Luxuries tend to have higher price elasticity; necessities have lower elasticity.

Budget Share

Goods taking a larger share of a consumer’s budget tend to have more elastic demand.

Time (Demand)

Demand becomes more elastic as consumers have more time to adjust after a price change.

Cross Elasticity of Demand (Ec)

Measures responsiveness of quantity demanded for one good to price changes of another good.

Substitutes (Ec > 0)

Goods for which an increase in the price of one raises demand for the other.

Complements (Ec < 0)

Goods for which an increase in the price of one lowers demand for the other.

Income Elasticity of Demand (Ey)

Measures responsiveness of quantity demanded to changes in consumer income.

Normal Good

Good with Ey > 0; demand rises when income rises.

Inferior Good

Good with Ey < 0; demand falls when income rises.

Income-Elastic Good

Normal good with Ey > 1; demand changes more than proportionally with income.

Income-Inelastic Good

Normal good with Ey < 1; demand changes less than proportionally with income.

Income Unit-Elastic Good

Good with Ey = 1; demand changes proportionally with income.

Price Elasticity of Supply (Es)

Measures responsiveness of quantity supplied to a change in price.

Elastic Supply

Es > 1; percentage change in quantity supplied exceeds percentage change in price.

Inelastic Supply

Es < 1; percentage change in quantity supplied is less than percentage change in price.

Unit Elastic Supply

Es = 1; percentage change in quantity supplied equals percentage change in price.

Perfectly Elastic Supply

Es = ∞; producers will supply any amount at one price but none at a slightly lower price.

Perfectly Inelastic Supply

Es = 0; quantity supplied is fixed regardless of price.

Time (Supply)

Longer adjustment periods generally make supply more elastic.

Linear Demand Curve Midpoint

At the midpoint of a straight-line demand curve, Ed equals 1.

Elastic Range (Linear Demand)

Upper segment of a straight-line demand curve where Ed > 1.

Inelastic Range (Linear Demand)

Lower segment of a straight-line demand curve where Ed < 1.

Coefficient Thresholds

Ed > 1 elastic; Ed < 1 inelastic; Ed = 1 unit elastic; Ed = ∞ perfectly elastic; Ed = 0 perfectly inelastic.

Percentage-Change Formula

ΔQ / Qavg divided by ΔP / Pavg; basis for elasticity calculations.

Normal vs. Inferior Identification

Sign of Ey (positive vs. negative) distinguishes normal from inferior goods.

Revenue Maximization Point

Total revenue peaks where Ed = 1 along a demand curve.

Skippy vs. Jif Example

Ec = +4.5 indicates peanut butters are substitutes.

Cars and Tyres Example

Ec = –2 indicates cars and tyres are complements.

Luxury Example

Jewelry is considered a luxury and tends to have high price elasticity of demand.

Budget Share Example

Cars (large budget share) have more elastic demand than oranges (small share).

Perfect Elasticity Example

Buyers purchase unlimited units at $5 but zero at $5.10, illustrating Ed = ∞.

Midpoint Example (Ed = 2)

A 10% price rise causing 20% drop in quantity demanded results in Ed = 2 (elastic).

Slope vs. Elasticity

Slope of a linear demand curve is constant, but elasticity varies along the curve.

Adjustment Period Effect

More time allows quantity supplied to increase, raising Es for most goods.