Elasticity of Supply and Demand – Key Vocabulary

30 vocabulary flashcards summarizing essential terms and definitions from the lecture on elasticity of demand and supply.

Elasticity

A measure of responsiveness of quantity demanded or supplied to changes in determinants such as price, income, or the price of related goods.

Price Elasticity of Demand (PED)

The percentage change in quantity demanded divided by the percentage change in price of the same good or service.

Price Elasticity of Supply (PES)

The percentage change in quantity supplied divided by the percentage change in price of the good or service.

Income Elasticity of Demand (YED)

The percentage change in quantity demanded divided by the percentage change in consumer income.

Cross Elasticity of Demand (XED)

The percentage change in quantity demanded of Good A divided by the percentage change in the price of Good B.

Law of Demand

Buyers purchase more of a good at lower prices and less at higher prices, ceteris paribus.

Law of Supply

Producers offer more of a good for sale at higher prices and less at lower prices, ceteris paribus.

Elastic Demand

Demand in which the elasticity coefficient is greater than 1; quantity demanded changes by a larger percentage than price.

Inelastic Demand

Demand in which the elasticity coefficient is less than 1; quantity demanded changes by a smaller percentage than price.

Unitary Elastic Demand

Demand in which the elasticity coefficient equals 1; percentage change in quantity demanded equals percentage change in price.

Perfectly Elastic Demand

Demand where any price increase drops quantity demanded to zero; elasticity is infinite (∞).

Perfectly Inelastic Demand

Demand where quantity demanded does not change when price changes; elasticity is zero.

Elastic Supply

Supply with an elasticity coefficient greater than 1; quantity supplied responds more than proportionally to price changes.

Inelastic Supply

Supply with an elasticity coefficient less than 1; quantity supplied responds less than proportionally to price changes.

Elasticity Coefficient

The numerical value indicating the degree of responsiveness; compares percentage changes in quantity and the determinant.

Substitute Goods

Products that can replace each other; a price rise in one increases demand for the other (positive cross elasticity).

Complementary Goods

Products used together; a price rise in one decreases demand for the other (negative cross elasticity).

Superior (Luxury) Good

A good with income elasticity greater than 1; demand rises more than proportionally with income.

Normal Good

A good with positive income elasticity (between 0 and 1); demand rises with income but less proportionally.

Inferior Good

A good with negative income elasticity; demand falls as consumer income rises.

Demand Schedule

A table showing quantities of a good demanded at different price levels.

Supply Schedule

A table showing quantities of a good supplied at different price levels.

Responsiveness

The degree to which quantity demanded or supplied reacts to changes in price, income, or other factors.

Negative Sign in PED

Indicates the inverse relationship between price and quantity demanded; often ignored when stating elasticity magnitude.

Linear Regression in Demand Analysis

Statistical method that fits a straight line to the relationship between price and quantity demanded to estimate elasticity.

Determinants of Demand

Factors such as price, income, tastes, and prices of related goods that influence quantity demanded.

Determinants of Supply

Factors such as price, production costs, technology, and number of sellers that influence quantity supplied.

Formula for PED

PED = (Q2 – Q1)⁄Q1 ÷ (P2 – P1)⁄P1.

Formula for PES

PES = (Qs2 – Qs1)⁄Qs1 ÷ (P2 – P1)⁄P1.

Interpretation of Elasticity Value

A coefficient >1 indicates elasticity, <1 indicates inelasticity, =1 indicates unitary response.