Economics Term 1 Exam Notes 2025

These flashcards cover key economics concepts related to elasticity, including types of elasticity, factors affecting elasticity, and definitions essential for understanding demand responsiveness in economic contexts.

Price Elasticity of Demand (PED)

Measures how responsive quantity demanded is to a change in price.

Inelastic Demand

Demand with a PED less than 1, where the change in quantity demanded is less-than-proportionate to the price.

Elastic Demand

Demand with a PED greater than 1, where the change in quantity demanded is more-than-proportionate to the price.

Calculating PED

Utilizes the percent change formula: PED = % Change in Quantity Demanded / % Change in Price.
Or Midpoint formula: (Q2-Q1 / ((Q1+Q2) /2)) / (P2-P1 / ((P1+P2) /2))

Total Revenue (TR)

The total income a firm receives from selling its goods, which is affected by PED.

Factors Affecting PED

Includes availability of substitutes, necessity vs. luxury, proportion of income spent, durability, time period, and habits & addictions.

Cross Elasticity of Demand (XED)

Measures how demand for one good responds to a price change in another good.

Positive XED

Indicates substitute goods; when the price of one good rises, the demand for the other good also rises.

Negative XED

Indicates complementary goods; when the price of one good rises, the demand for the other good falls.

Income Elasticity of Demand (YED)

Measures how demand changes in response to income changes.

Normal Goods

Goods for which demand increases as income increases; YED > 0.

Inferior Goods

Goods for which demand decreases as income increases; YED < 0.

Perfectly Inelastic Demand

Demand that does not change regardless of price changes; PED = 0.

Perfectly Elastic Demand

Demand that is infinitely responsive to price changes; PED = ∞.

If the PED = 1, what does this indicate?

Unitary Elastic

If the PED > 1, what does this indicate?

Elastic Demand

If the PED < 1, what does this indicate?

Inelastic Demand

If the PED = 0, what does this indicate?

Perfectly Inelastic Demand

If the PED approaches infinity, what does this indicate?

Perfectly Elastic Demand