Chapter 5: Elasticity and Its Application

These flashcards cover key concepts from the lecture on elasticity in microeconomics, including definitions, measurements, and examples.

Elasticity

A measure of how much the quantity demanded or supplied of a good responds to changes in price.

Total Revenue (TR)

The total income a firm receives from selling its product, calculated as price times quantity.

Inelastic Demand

Demand is inelastic when a change in price results in a smaller percentage change in quantity demanded.

Elastic Demand

Demand is elastic when a change in price results in a larger percentage change in quantity demanded.

Unit Elastic Demand

Demand is unit elastic when a change in price results in a proportional change in quantity demanded.

Price Elasticity of Demand (Ep)

A measure of the responsiveness of quantity demanded to a change in price.

Perfectly Inelastic Demand

Demand for a good is said to be perfectly inelastic when the quantity demanded does not change as the price changes.

Perfectly Elastic Demand

Demand for a good is said to be perfectly elastic when the quantity demanded changes infinitely with any change in price.

Income Elasticity of Demand (EI)

A measure of how much the quantity demanded of a good responds to changes in consumer income.

Inferior Goods

Goods for which demand decreases as income increases.

Normal Goods

Goods for which demand increases as income increases.

Cross-Price Elasticity of Demand (Exy)

A measure of how the quantity demanded of one good responds to changes in the price of another good.

Determinants of Elasticity

Factors that influence the elasticity of demand, including availability of substitutes, market definition, time horizon, and the price of goods.

Short-Run vs. Long-Run Estimates of Price Elasticity

Short-run elasticity estimates tend to be lower than long-run elasticity estimates because consumers take time to adjust to price changes.

Price Sensitivity

The degree to which the quantity demanded of a good changes in response to a change in its price.

Total Revenue Test

A method to determine if demand is elastic or inelastic based on how total revenue changes when price changes.

Examples of Elasticity

Examples comparing items like Rice Krispies and Sunscreen show that price elasticity is higher when close substitutes are available.