Elasticity (Chapter Five) - Price Elasticity of Demand

Vocabulary flashcards covering elasticity concepts from Chapter Five.

Price elasticity of demand

A measure of how much the quantity demanded of a good responds to a change in its price; calculated as the percentage change in quantity demanded divided by the percentage change in price.

Elastic demand

A demand in which quantity demanded changes a lot in response to price changes; elasticity > 1 in absolute value; flatter demand curve.

Inelastic demand

A demand in which quantity demanded changes little in response to price changes; elasticity < 1 in absolute value; steeper demand curve.

Unitary elasticity

Elasticity equals 1; the percentage change in quantity equals the percentage change in price; total revenue is maximized at this point.

Perfectly inelastic demand

Elasticity equals 0; quantity demanded does not respond to price changes; vertical demand curve.

Perfectly elastic demand

Elasticity equals infinity; quantity demanded responds completely to price changes; horizontal demand curve.

Determinant: substitutes

More close substitutes lead to higher elasticity; fewer substitutes lead to lower elasticity.

Determinant: time frame

Elasticity is higher in longer time frames as substitutes become more viable; in the short run, demand is less elastic.

Determinant: income share

Goods that take up a larger share of income tend to have higher elasticity; small-share goods tend to be less elastic.

Determinant: luxury vs. necessity

Luxuries tend to be more elastic; necessities tend to be less elastic; exceptions can occur.

Determinant: narrowness of market

Narrow markets have higher elasticity due to more substitutes; broad markets have lower elasticity since substitutes are limited.

Midpoint formula for price elasticity of demand

Elasticity = (Q2 − Q1) / [(Q2 + Q1)/2] ÷ [(P2 − P1) / [(P2 + P1)/2]] or equivalently = (Q2 − Q1)/(P2 − P1) × (P2 + P1)/(Q2 + Q1).