Elasticity and Its Applications

These flashcards cover key terms related to elasticity, its applications, and implications in economics.

Elasticity

The measure of how much consumers or suppliers respond to changes in prices.

Price Elasticity of Demand

Measures how much quantity demanded responds to a change in price.

Elastic Demand

Occurs when the price elasticity of demand is greater than 1, indicating a substantial change in quantity demanded with a change in price.

Inelastic Demand

Occurs when the price elasticity of demand is less than 1, indicating that a change in price barely affects the quantity demanded.

Unit Elastic Demand

Occurs when the price elasticity of demand is equal to 1, indicating that the percentage change in quantity demanded is equal to the percentage change in price.

Perfectly Inelastic Demand

Occurs when a change in price does not affect the quantity demanded at all (Elasticity = 0).

Perfectly Elastic Demand

Occurs when little to no change in price leads to a drastic change in demand (Elasticity = ∞).

Midpoint Method

A method used to calculate elasticity that avoids discrepancies by averaging the start and end values.

Cross-price Elasticity of Demand

A measure of how much the quantity demanded of one good responds to a change in price of another good.

Income Elasticity of Demand

Measures how the quantity demanded responds to changes in consumer income.

Normal Goods

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

Inferior Goods

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

Geffen Goods

Goods for which demand increases as the price increases, typically due to lack of substitutes.

Price Elasticity of Supply

Measures how much quantity supplied responds to a change in price.

Determinants of Price Elasticity

Factors that influence elasticity of demand or supply such as availability of substitutes, necessities vs. luxuries, market definition, and time horizon.

Total Revenue

The total amount of money a company receives from sales, calculated as Price multiplied by Quantity.