Microeconomics: Market Forces - Shocks and Elasticities

A comprehensive set of vocabulary flashcards covering the fundamental concepts of elasticity, price sensitivity, the relationship between elasticity and revenue, and the classification of goods based on income and cross-price effects as presented in Microeconomics Chapter 4.

Elasticity

A measure of the sensitivity of a variable for changes in one explanatory variable, expressed as the relationship between percentage changes in a cause (denominator) and an effect (numerator).

Dimensionless

A property of elasticities meaning they are insensitive to units such as $€$, $,$ $,$ meters, or yards.

Unitary Elasticity

A situation where the elasticity value is exactly $1$ (in absolute value), meaning there is perfect proportionality between the cause and the effect.

Elastic Relationship

A relationship where the elasticity value is greater than $1$ ($|ε| > 1$), indicating that the effect is stronger or more sensitive than the cause.

Inelastic Relationship

A relationship where the elasticity value is less than $1$ ($|ε| < 1$), indicating that the effect is weaker or more insensitive than the cause.

Own price elasticity of demand

The percentage change in the quantity demanded divided by the percentage change in the own price.

Arc elasticity

A technique used to calculate elasticity for "large" changes in price and quantity demanded over a particular stretch of the demand curve using the formula $\frac{(q_1 - q_0)/q_0}{(p_1 - p_0)/p_0}$.

Point elasticity

A technique used to calculate elasticity for "small" changes in price and quantity at a specific point, often using the mathematical derivative of the demand function ($\frac{dQ}{dP} \times \frac{P}{Q}$).

Perfectly price inelastic demand

A situation where the quantity demanded does not change regardless of price changes ($ε_D^p = 0$), represented by a vertical demand curve.

Perfectly price elastic demand

A situation where the price sensitivity is infinite ($ε_D^p = - ∞$), represented by a horizontal demand curve.

Marginal Revenue (MR)

The extra revenue generated when one additional unit is sold; it is positive in the elastic part of the demand curve and negative in the inelastic part.

Price Discrimination

The practice of charging higher prices to price-insensitive consumers and lower prices to price-sensitive consumers.

Ordinary Goods

Goods or services for which there is a negative relationship between price and demand, driven by the substitution and income effects.

Substitution Effect

The change in demand resulting from consumers replacing more expensive products with cheaper alternatives following a price increase.

Income Effect

The change in demand resulting from a price increase reducing the purchasing power of a consumer's unchanged income.

Giffen Goods

Exceptional goods where a price increase leads to an increase in the quantity demanded.

Snob Goods

Goods where changes in preferences break the typical negative relationship between price and quantity demanded.

Own price elasticity of supply

The percentage change in the quantity supplied divided by the percentage change in the own price.

Income elasticity of demand

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

Normal Goods

Goods with a positive income elasticity ($ε > 0$), meaning consumption increases as income increases.

Necessary Goods (Necessities)

Normal goods with a small income elasticity between $0$ and $1$ ($0 < ε < 1$), where the budget share decreases as income increases.

Luxury Goods (Luxuries)

Normal goods with a high income elasticity ($ε > 1$), where the budget share increases as income increases.

Inferior Goods

Goods with a negative income elasticity ($ε < 0$), meaning consumption decreases as income increases.

Engel's Law

The observation by Ernst Engel that as someone becomes richer, the relative share of food expenditures in their total expenditure decreases.

Engel Curve

A curve that describes the relationship between consumer income and the quantity demanded of a good.

Cross-price elasticity of demand

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

Substitutes (Demand side)

Goods with a positive cross-price elasticity, meaning an increase in the price of one leads to an increase in the demand for the other.

Complements (Demand side)

Goods with a negative cross-price elasticity, meaning an increase in the price of one leads to a decrease in the demand for the other.

Independent Goods

Goods with a cross-price elasticity of zero, where the price of one good has no impact on the demand for the other.

Cross-price elasticity of supply

The percentage change in the quantity supplied of good $A$ divided by the percentage change in the selling price of good $B$.