Elasticity and Its Application

Flashcards focusing on key terms and concepts related to elasticity in economics.

Elasticity

A measure of the responsiveness of the quantity demanded or quantity supplied to a change in one of its determinants.

Price Elasticity of Demand

Measures how much the quantity demanded of a good responds to a change in the price of that good.

Inelastic Demand

Demand is inelastic if quantity demanded responds only slightly to price changes.

Elastic Demand

Demand is elastic if quantity demanded responds substantially to price changes.

Key Determinants of Demand Elasticity

Factors such as availability of close substitutes, necessities vs luxuries, market definition, and time horizon.

Total Revenue (TR)

The amount paid by buyers and received by sellers, calculated as TR = P × Q.

Midpoint Method

A method used to calculate price elasticity that takes the midpoint of quantity and price changes.

Income Elasticity of Demand

Measures how quantity demanded responds to changes in consumer income, distinguishing between normal and inferior goods.

Cross-Price Elasticity of Demand

Measures how quantity demanded of one good responds to a change in the price of another good, indicating substitutes or complements.

Price Elasticity of Supply

Measures how much the quantity supplied of a good responds to a change in the price of that good.

Perfectly Inelastic Demand

Elasticity equals 0; quantity demanded does not change with price changes.

Unit Elastic Demand

Elasticity equals 1; percentage change in quantity demanded is equal to percentage change in price.

Perfectly Elastic Demand

Elasticity equals infinity; any change in price leads to an infinite change in quantity demanded.

Inelastic Supply

Supply is inelastic if quantity supplied changes only slightly in response to price changes.

Elastic Supply

Supply is elastic if quantity supplied changes substantially in response to price changes.

Scenario of Increased Wheat Production

A case where a new hybrid wheat increases production but causes total revenue for farmers to fall due to inelastic demand.

Long-Run Elasticity of Supply and Demand

In the long run, both supply and demand tend to be more elastic, causing smaller price increases from the same shift.