Elasticity in Economics

This set of flashcards covers key concepts related to elasticity in economics, including definitions and examples.

Elasticity

Measures the proportionate change in one variable due to a change in another variable.

Price Elasticity of Demand (PED)

Measures the proportionate change in quantity demanded due to a change in price.

Price Elastic Demand

Occurs when the PED is greater than one; demand is responsive to price changes.

Price Inelastic Demand

Occurs when the PED is less than one; demand is not very responsive to price changes.

Unitary Elastic Demand

Occurs when the PED is equal to one; percentage change in quantity demanded is equal to the percentage change in price.

Perfectly Inelastic Demand

Occurs when the PED is equal to zero; a change in price will have no influence on quantity demanded.

Perfectly Elastic Demand

Occurs when the PED is infinite; any change in price will cause quantity demanded to fall to zero.

Income Elasticity of Demand (YED)

Measures the percentage change in quantity demanded due to a percentage change in income.

Positive Income Elasticity of Demand

Indicates a positive relationship between income and quantity demanded; can be elastic or inelastic.

Negative Income Elasticity of Demand

Indicates a negative relationship between income and quantity demanded; can be elastic or inelastic.

Inferior Goods

Goods that have a negative income elasticity of demand, meaning demand falls as income rises.

Necessities

Goods with an income elasticity of demand between 0 and +1; demand rises with income, but less than proportionately.

Luxuries

Goods with an income elasticity of demand greater than +1; demand rises more than proportionately to a change in income.

Cross Elasticity of Demand (XED)

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

Substitutes

Goods that can replace each other; positive cross elasticity of demand occurs when price of one rises and demand for the other increases.

Complements

Goods that are used together; negative cross elasticity of demand occurs when the price of one rises and demand for the other decreases.