Comprehensive Guide to Price, Income, and Cross-Price Elasticity of Demand

Vocabulary practice flashcards covering Price Elasticity of Demand, midpoint calculation formulas, elastic vs. inelastic segments, relationship to total revenue, Income Elasticity of Demand, and Cross-Price Elasticity of Demand from Chapter 6.

Law of Demand

An economic principle stating that as the price of a good declines, consumers will buy more of it.

Price Elasticity of Demand

A measure of how responsive consumers are to a change in price, calculated as: $\text{-----------}=\frac{\%\,\text{Change in Quantity}}{\%\,\text{Change in Price}}$

Midpoint Formula for Price Elasticity of Demand

The formula used to compute price elasticity between two points using average quantity and average price: $\text{---------}=\frac{Q_2 - Q_1}{\frac{Q_1 + Q_2}{2}}\div\frac{P_2 - P_1}{\frac{P_1 + P_2}{2}}=\frac{\text{Change in Quantity}}{\text{Average Quantity}}\div\frac{\text{Change in Price}}{\text{Average Price}}$

Inelastic Demand

A condition where the Price Elasticity of Demand is between $0$ and $-1$ (an absolute value between $0$ and $1$), meaning the percentage change in quantity is less than the percentage change in price.

Unit Elastic Demand

A condition where the Price Elasticity of Demand is equal to $-1$ (an absolute value of $1$), meaning the percentage change in quantity equals the percentage change in price.

Elastic Demand

A condition where the Price Elasticity of Demand is below $-1$ (an absolute value greater than $1$), meaning the percentage change in quantity is greater than the percentage change in price.

Elasticity Distribution along a Demand Curve

The structural division where every downward-sloping linear demand curve contains an elastic portion at upper prices and an inelastic portion at lower prices, divided by a unit elastic point.

Mostly Elastic Demand Curve

A demand curve on which the elastic portion is larger than the inelastic portion.

Mostly Inelastic Demand Curve

A demand curve on which the inelastic portion is larger than the elastic portion.

Total Revenue

The total amount received by suppliers from the sale of goods, calculated as: $\text{Total Revenue} = \text{Price} \times \text{Quantity}$

Total Revenue Effect under Elastic Demand

When demand is elastic, a price increase causes total revenue to fall because quantity drops proportionately more than price rises; conversely, a price decrease causes total revenue to rise.

Total Revenue Effect under Inelastic Demand

When demand is inelastic, a price increase causes total revenue to rise because quantity falls proportionately less than price increases; conversely, a price decrease causes total revenue to fall.

Unit Elasticity Revenue Maximization

The principle that at the point of unit elasticity, a price increase or decrease leaves total revenue unchanged, meaning revenues reach their maximum value.

Income Elasticity of Demand

A measure of the responsiveness of consumer demand to changes in income ($I$), calculated as: $-------=\frac{\%\,\text{Change in Quantity}}{\%\,\text{Change in Income}}$ ; it determines whether a good is a luxury, a necessity, or an inferior good.

Cross-Price Elasticity of Demand

A measure of how responsive consumer demand for one product is to a price change in another product, calculated as: $\text{----------}=\frac{\%\,\text{Change in Quantity of Good A}}{\%\,\text{Change in Price of Good B}}$ ; it determines whether goods are complements or substitutes.