Introduction to Microeconomics: Elasticity

A collection of 30 flashcards focused on vocabulary and definitions related to elasticity in microeconomics.

Elasticity

A measure of the responsiveness of quantity demanded or supplied to changes in price or income.

Price Elasticity of Demand

Measures the percentage change in quantity demanded in response to a percentage change in price.

Price Elasticity of Supply

Measures the responsiveness of quantity supplied to changes in price.

Cross-Price Elasticity of Demand

Measures how the quantity demanded of one good responds to a change in the price of another good.

Income Elasticity of Demand

Measures how the quantity demanded changes in response to changes in consumer income.

Elastic Demand

A situation where a change in price leads to a relatively large change in quantity demanded (|εd| > 1).

Inelastic Demand

A situation where a change in price leads to a relatively small change in quantity demanded (|εd| < 1).

Unit Elastic Demand

A situation in which a change in price causes an equal percentage change in quantity demanded (|εd| = 1).

Perfectly Elastic Demand

A situation where any price increase will reduce quantity demanded to zero (|εd| = ∞).

Perfectly Inelastic Demand

Quantity demanded remains constant regardless of price changes (|εd| = 0).

Determinants of Price Elasticity of Demand

Factors affecting how sensitive consumers are to price changes, including availability of substitutes and necessity of the good.

Midpoint Formula

A method used to calculate elasticity at the midpoint of two points on a curve, giving a more accurate measure of elasticity.

Total Revenue (TR)

The total amount of money a firm receives from sales, calculated as TR = Price (P) x Quantity (Q).

Revenue Effect of Price Change

How total revenue changes in response to a price increase or decrease, which depends on the elasticity of demand.

Substitutes

Goods that can replace each other; an increase in the price of one will increase the demand for the other.

Complements

Goods that are consumed together; an increase in the price of one will decrease the demand for the other.

Normal Goods

Goods for which demand increases as consumer income increases (εI > 0).

Luxury Goods

A subset of normal goods for which demand increases more than proportionately as income rises (εI > 1).

Inferior Goods

Goods for which demand decreases as consumer income rises (εI < 0).

Adjustment Time

The period over which consumers can adjust their purchase behavior in response to price changes.

Scope of the Market

The range of goods considered in the market and how it influences elasticity.

Availability of Substitutes

Impacts consumers' sensitivity to price changes; more substitutes typically lead to more elastic demand.

Flexibility of Production

How easily producers can adjust the quantity supplied in response to price changes.

Factors Affecting Price Elasticity of Supply

Includes availability of inputs, production flexibility, and adjustment time.

Changes in Total Revenue and Price Elasticity

If demand is elastic, a price increase decreases total revenue; if inelastic, it increases total revenue.

Calculation of Cross-Price Elasticity

Determined by % change in quantity demanded of good A divided by % change in price of good B.

Positive Cross-Price Elasticity

Indicates that two goods are substitutes (εA,B > 0).

Negative Cross-Price Elasticity

Indicates that two goods are complements (εA,B < 0).

Independent Goods

Raise no relationship between demand and price change of each other (εA,B = 0).

Price Sensitivity

Consumer readiness to change quantity demanded in reaction to changes in price.

Price Changes

Variations in the amount charged for a good, significantly impacting demand based on elasticity.

Economic Measures of Elasticity

Tools used to assess how much quantity responds to price, income, and substitutes.