Chapter 5 — Elasticity: Measuring Responsiveness

Vocabulary flashcards summarizing key elasticity concepts, definitions, formulas, and determinants from Chapter 5 lecture notes.

Price Elasticity of Demand (PED)

Measures how much quantity demanded changes in percentage terms when price changes by 1%; calculated as %ΔQ / %ΔP and reported in absolute value.

Elastic Demand

Demand with |PED| > 1; quantity demanded changes by a larger percentage than price, so buyers are highly responsive and the curve appears relatively flat.

Inelastic Demand

Demand with |PED| < 1; quantity demanded changes by a smaller percentage than price, so buyers are not very responsive and the curve appears relatively steep.

Perfectly Elastic Demand

Horizontal demand curve with PED = ∞; any tiny price change causes an infinite change in quantity demanded.

Perfectly Inelastic Demand

Vertical demand curve with PED = 0; quantity demanded does not change at all when price changes.

Law of Demand

All else equal, a fall in price raises quantity demanded and a rise in price lowers quantity demanded.

Midpoint Formula

%Δ = (New – Old) / [(New + Old) / 2]; eliminates base-point bias when computing percentage changes for elasticity.

Determinants of PED

Number of substitutes, narrowness of definition (brand vs. category), necessity vs. luxury, ease of search, and length of time to adjust.

Substitutability

Extent to which other goods can replace a product; greater substitutability makes demand more elastic.

Total Revenue (TR)

Dollar amount a seller receives, calculated as Price × Quantity sold.

Elasticity–Revenue Rule

With elastic demand, price cuts raise TR; with inelastic demand, price increases raise TR.

Cross-Price Elasticity of Demand (XED)

%Δ in quantity demanded of good X divided by %Δ in price of good Y; shows how related goods affect each other’s demand.

Substitutes (Positive XED)

Goods that can replace one another; a price rise in one increases demand for the other (XED > 0).

Complements (Negative XED)

Goods consumed together; a price rise in one decreases demand for the other (XED < 0).

Income Elasticity of Demand (YED)

%Δ in quantity demanded divided by %Δ in income; shows how purchases respond to income changes.

Normal Goods

Goods with positive YED; demand rises when income rises.

Inferior Goods

Goods with negative YED; demand falls when income rises.

Necessities

Items with small, positive YED and relatively inelastic demand; consumers buy them even when income changes.

Luxuries

Items with large, positive YED and relatively elastic demand; purchases rise sharply as income grows.

Price Elasticity of Supply (PES)

Measures how much quantity supplied changes in percentage terms when price changes by 1%; %ΔQS / %ΔP, always positive.

Elastic Supply

Supply with PES > 1; sellers can greatly increase output when price rises, giving a relatively flat supply curve.

Inelastic Supply

Supply with PES < 1; sellers cannot expand output much when price rises, giving a relatively steep supply curve.

Perfectly Elastic Supply

Horizontal supply curve with PES = ∞; suppliers will provide any quantity at one price but none at a slightly lower price.

Perfectly Inelastic Supply

Vertical supply curve with PES = 0; quantity supplied is fixed regardless of price.

Determinants of PES

Inventories, availability of variable inputs, unused production capacity, ease of market entry/exit, and the passage of time.

Inventories

Stockpiled goods that let firms meet higher demand quickly, making supply more elastic.

Variable Inputs

Inputs that can be increased easily (e.g., labor, raw materials); easy access raises supply elasticity.

Extra Capacity

Unused plant or equipment that allows quick output expansion, increasing supply elasticity.

Ease of Entry and Exit

Low barriers encourage new firms to enter or leave, making market supply more elastic.

Time Horizon and Elasticity

Both demand and supply become more elastic as consumers and producers have more time to adjust.

Flexibility (Supply)

Overall ability of sellers to alter production in response to price changes; greater flexibility means more elastic supply.