Elasticities of Demand and Supply

Flashcards covering key concepts of price elasticity of demand and supply, their factors, and definitions.

Price Elasticity of Demand (PED)

Measures the responsiveness of demand to a change in price.

Perfectly Elastic Demand

Demand is highly responsive to price changes; any price change causes an infinite change in quantity demanded.

Perfectly Inelastic Demand

Demand does not change regardless of price changes; no effect on quantity demanded.

Factors Influencing PED

Includes availability of substitutes, necessity vs luxury goods, proportion of income spent, and time period.

Income Elasticity of Demand (YED)

Measures the responsiveness of demand to changes in real income.

Normal Goods

Goods for which demand increases as income rises; have positive YED.

Inferior Goods

Goods for which demand decreases as income rises; have negative YED.

Cross Elasticity of Demand (XED)

Measures how the quantity demanded for one good is affected by the price change of another good.

Price Elasticity of Supply (PES)

Measures the responsiveness of the quantity supplied of a good to a change in its price.

Short Run Supply Elasticity

Supply is generally less elastic in the short run as firms cannot quickly adjust production levels.

Long Run Supply Elasticity

In the long run, all factors of production are variable, allowing firms to adjust supply more easily.

Joint Demand

Goods that are purchased together; demand for one increases demand for the other.

Derived Demand

Demand for one good that arises from the demand for another good.

Composite Demand

Demand for a good that has multiple uses, such as milk for both cheese and butter.

Factors Affecting PES

Include the mobility of factors of production, time period, and spare production capacity.