Price Elasticity of Demand and Supply

These flashcards summarize key concepts related to the price elasticity of demand and supply, including definitions, formulas, and examples.

What is the price elasticity of demand?

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

What happens to equilibrium price and quantity when supply increases?

When supply increases, the equilibrium price falls and the equilibrium quantity increases.

What characterizes a perfectly inelastic demand curve?

The demand curve is vertical, indicating that quantity demanded does not change with price changes.

What indicates a perfectly elastic demand?

The price elasticity of demand is infinite, meaning that quantity demanded changes infinitely with a slight change in price.

When is demand considered elastic?

Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price, making the price elasticity of demand greater than 1.

What is the formula to calculate price elasticity of demand?

Price elasticity of demand = (Percentage change in quantity demanded) / (Percentage change in price).

What does a price elasticity of demand less than 1 indicate?

It indicates inelastic demand, meaning quantity demanded is not very responsive to price changes.

What is the significance of the negative sign in elasticity calculations?

Due to the law of demand, there is an inverse relationship between price and quantity demanded, hence elasticity is often expressed as a negative number.

How does demand elasticity vary along a linear demand curve?

Demand is unit elastic at the midpoint of the curve, elastic above the midpoint, and inelastic below the midpoint.

What is cross elasticity of demand?

It measures the responsiveness of the quantity demanded for a good to a change in the price of a substitute or complement.

What does it mean when the cross elasticity of demand is positive?

It indicates that the goods are substitutes.

What is the defining characteristic of income elasticity of demand?

It measures how the quantity demanded of a good responds to a change in income.

What is the implication of an income elasticity of demand being less than 0?

It suggests that the good is considered an inferior good.

What factors influence the elasticity of demand?

The closeness of substitutes, the proportion of income spent on the good, and the time elapsed since a price change.

What factors influence the elasticity of supply?

Resource substitution possibilities and the time frame for supply decisions.

Describe what happens to total revenue when demand is elastic.

When demand is elastic, a price cut increases total revenue.

What does it mean when supply is perfectly inelastic?

It indicates that quantity supplied does not change regardless of a change in price.

What is the price elasticity of demand?\n\n

It is a measure of the responsiveness of the quantity demanded to a change in price.\n\n

What happens to equilibrium price and quantity when supply increases?\n\n

When supply increases, the equilibrium price falls and the equilibrium quantity increases.\n\n

What characterizes a perfectly inelastic demand curve?\n\n

The demand curve is vertical, indicating that quantity demanded does not change with price changes.\n\n

What indicates a perfectly elastic demand?\n\n

The price elasticity of demand is infinite, meaning that quantity demanded changes infinitely with a slight change in price.\n\n

When is demand considered elastic?\n\n

Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price, making the price elasticity of demand greater than 1.\n\n

What is the formula to calculate price elasticity of demand?\n\n

Price elasticity of demand = (Percentage change in quantity demanded) / (Percentage change in price).\n\n

What does a price elasticity of demand less than 1 indicate?\n\n

It indicates inelastic demand, meaning quantity demanded is not very responsive to price changes.\n\n

What is the significance of the negative sign in elasticity calculations?\n\n

Due to the law of demand, there is an inverse relationship between price and quantity demanded, hence elasticity is often expressed as a negative number.\n\n

How does demand elasticity vary along a linear demand curve?\n\n

Demand is unit elastic at the midpoint of the curve, elastic above the midpoint, and inelastic below the midpoint.\n\n

What is cross elasticity of demand?\n\n

It measures the responsiveness of the quantity demanded for a good to a change in the price of a substitute or complement.\n\n

What does it mean when the cross elasticity of demand is positive?\n\n

It indicates that the goods are substitutes.\n\n

What is the defining characteristic of income elasticity of demand?\n\n

It measures how the quantity demanded of a good responds to a change in income.\n\n

What is the implication of an income elasticity of demand being less than 0?\n\n

It suggests that the good is considered an inferior good.\n\n

What factors influence the elasticity of demand?\n\n

The closeness of substitutes, the proportion of income spent on the good, and the time elapsed since a price change.\n\n

What factors influence the elasticity of supply?\n\n

Resource substitution possibilities and the time frame for supply decisions.\n\n

Describe what happens to total revenue when demand is elastic.\n\n

When demand is elastic, a price cut increases total revenue.\n\n

What does it mean when supply is perfectly inelastic?\n\n

It indicates that quantity supplied does not change regardless of a change in price.\n\n

What happens to total revenue when demand is inelastic?\n\n

When demand is inelastic, a price cut decreases total revenue.\n\n

What is unit elastic demand?\n\n

It occurs when the percentage change in quantity demanded is equal to the percentage change in price, resulting in a price elasticity of exactly 1.\n\n

What is the relationship between total revenue and price elasticity of demand?\n\n

Total revenue increases when price decreases if demand is elastic, and total revenue decreases when price decreases if demand is inelastic.\n\n

What is the elasticity of demand for necessities versus luxuries?\n\n

The demand for necessities tends to be inelastic, while the demand for luxuries is generally elastic.\n\n

What are substitutes and complements in the context of elasticity?\n\n

Substitutes are goods that can replace each other, while complements are goods that are used together.\n\n

How does time affect price elasticity of supply?\n\n

The longer producers have to respond to price changes, the more elastic the supply becomes.\n\n

What is the implication of a negative cross elasticity of demand?\n\n

It indicates that the goods are complements.\n\n

How does advertising influence demand elasticity?\n\n

Effective advertising can create brand loyalty, making demand less elastic.\n\n

What role does consumer income play in demand elasticity?\n\n

Higher income can increase the quantity demanded, potentially making demand more elastic for non-essential goods.\n\n

How do luxury goods behave with respect to income elasticity?\n\n

Luxury goods typically have an income elasticity greater than 1, meaning quantity demanded increases more than proportionately with income.\n\n

What is the significance of the time effect in elasticity analysis?\n\n

In the short run, demand and supply may be more inelastic, but over time they tend to become more elastic as consumers and producers adjust.\n\n

How do market structures influence elasticity?\n\n

In monopolistic competition, demand may be more elastic due to available substitutes compared to monopolies where demand is often less elastic.\n\n

What is the difference between short-run and long-run elasticity?\n\n

Short-run elasticity is typically lower since consumers and suppliers have less time to adjust, while long-run elasticity is usually higher as they have more time to adapt.\n\n

How can government policies affect demand elasticity?\n\n

Policies such as taxes or subsidies can impact the price of goods, altering their demand elasticity.\n\n