ECON 103: Microeconomic Principles - Elasticity and Foundations

Vocabulary practice flashcards covering price elasticity of demand and supply, its determinants, the midpoint method formula, and total revenue dynamics from ECON 103.

Elasticity

A measure of the magnitude of responsiveness or sensitivity of quantity demanded or quantity supplied to a change in price, answering by how much quantity changes.

Price Elasticity of Demand ($E_d$)

The percentage change in quantity demanded divided by the percentage change in price ($\frac{\%\Delta Q_d}{\%\Delta P}$), expressed as an absolute value by dropping the negative sign.

Price Elasticity of Supply

A measure of how responsive the quantity supplied on the sellers' side of the market is to a change in price.

Elastic Demand

A situation where $E_d > 1$ ($\%\Delta Q_d > \%\Delta P$), meaning buyers are relatively responsive and a given price change results in a proportionally larger change in quantity demanded.

Inelastic Demand

A situation where $E_d < 1$ ($\%\Delta Q_d < \%\Delta P$), meaning buyers are relatively unresponsive and a given price change results in a proportionally smaller change in quantity demanded.

Unit Elastic Demand

A situation where $E_d = 1$ ($\%\Delta Q_d = \%\Delta P$), meaning a change in price results in an exactly proportional change in quantity demanded.

Demand Curve Slope and Elasticity

On a standard price-quantity diagram, the flatter demand curve ($D_e$) represents relatively more elastic demand, while the steeper demand curve ($D_i$) represents relatively more inelastic demand for the same price change.

Availability of Substitutes

The primary determinant of elasticity; goods with numerous available alternatives exhibit more elastic demand, whereas goods with few or no substitutes (like insulin) exhibit highly inelastic demand.

Second Law of Demand

The principle stating that as time passes, the price elasticity of demand becomes more elastic because consumers have more time to adapt and producers have more time to introduce alternatives.

Market Definition (Elasticity Determinant)

The specificity of a market boundary; narrowly defined markets (such as a specific brand like Dunkin' coffee) have more elastic demand than broadly defined markets (such as coffee in general) due to greater substitute availability.

Consumer Perceptions (Necessity vs. Luxury)

A determinant of elasticity where goods perceived as necessities (e.g., housing) face relatively inelastic demand, while goods perceived as luxuries (e.g., flat screen TVs) face relatively elastic demand.

Portion of Consumer Income

A determinant of elasticity where goods that represent a large portion of a consumer's budget (e.g., a new car) have relatively elastic demand, whereas goods that represent a small budget share (e.g., salt) have relatively inelastic demand.

Midpoint Method Formula

The standard technique for calculating price elasticity between two points: $\frac{Q_{\text{after}} - Q_{\text{before}}}{(Q_{\text{after}} + Q_{\text{before}}) / 2} \div \frac{P_{\text{after}} - P_{\text{before}}}{(P_{\text{after}} + P_{\text{before}}) / 2}$.

Elasticity Multiplier Property

The relationship used to calculate quantity changes from elasticity: $\text{\% Change in } Q_d = E_d \times \text{\% Change in } P$.

Total Revenue

The total gross income received by a seller from goods sold, computed as price multiplied by quantity ($\text{Total Revenue} = P \times Q$).

Price Effect

The positive impact on total revenue that occurs after a price increase because each remaining unit is sold at a higher price.

Quantity Effect

The negative impact on total revenue that occurs after a price increase because fewer total units are sold according to the law of demand.

Total Revenue Test: Inelastic Demand

When $E_d < 1$, the price effect dominates the quantity effect, causing price and total revenue to move in the same direction (a price increase raises total revenue).

Total Revenue Test: Elastic Demand

When $E_d > 1$, the quantity effect dominates the price effect, causing price and total revenue to move in opposite directions (a price increase reduces total revenue).

Total Revenue Test: Unit Elastic Demand

When $E_d = 1$, the price effect and quantity effect exactly offset each other, causing total revenue to remain unchanged after a price adjustment.