Elasticity of Demand and Supply Flashcards

These flashcards cover key concepts regarding elasticity of demand and supply from the lecture notes.

What does price elasticity of demand measure?

It measures how responsive quantity demanded is with respect to price changes.

What is the formula for calculating price elasticity of demand?

𝜖 = % change in quantity demanded / % change in price

What does it mean if |𝜖| > 1?

Demand is elastic, meaning the change in quantity demanded is larger than the price change.

Define perfectly inelastic demand.

Perfectly inelastic demand has elasticity of 𝜖 = 0, meaning quantity demanded is completely unresponsive to price changes.

What key factor affects the price elasticity of demand related to substitutes?

The availability of close substitutes; more substitutes result in more elastic demand.

How does the passage of time affect price elasticity of demand?

Demand becomes more elastic in the long run as consumers adjust their behavior.

Describe the difference between luxuries and necessities in terms of elasticity.

Demand for luxuries is elastic, while demand for necessities is inelastic.

What is the midpoint formula used for in economics?

It is used to calculate elasticity by dividing the change in price (and quantity) by the average.

What happens to total revenue when demand is elastic and price decreases?

Total revenue increases because the relatively large increase in quantity demanded outweighs lost revenue from lower prices.

What does cross-price elasticity of demand indicate?

It measures the responsiveness of demand for one good to price changes of another good.

How is income elasticity of demand defined?

It measures the responsiveness of demand with respect to income changes.

What does it mean if a good has a positive income elasticity?

The good is classified as a normal good.

Define price elasticity of supply.

It measures how responsive quantity supplied is with respect to changes in price.

What does supply inelasticity indicate?

If 𝜖 < 1, supply is inelastic, meaning it is unresponsive to price changes.