Elasticity Lectures 1 and 2 - notes and flashcards.

Flashcards covering the fundamentals of elasticity, including price elasticity of demand and supply, cross-price elasticity, income elasticity, and their effects on total revenue.

Elasticity

A measure of responsiveness to a change in market conditions, applying to both supply and demand.

Price elasticity of demand

A measure of the magnitude of the change in the quantity demanded from a change in its price, which quantifies the law of demand.

Elastic good

A good that is very price sensitive, meaning the quantity demanded will change a lot in response to a small change in price; has an elasticity greater than $1$.

Inelastic good

A good that is not very price sensitive, where consumers keep buying it even if the price changes significantly; has an elasticity less than $1$.

Unit elastic

A condition where there is a one-to-one change between price and quantity, meaning they change by exactly the same amount.

Perfectly elastic

Represented by a flat horizontal line on a graph, where any change in price at all cause quantity demanded to fall to zero.

Perfectly inelastic

Represented by a vertical line on a graph, where the same quantity of the product is demanded at any price.

Availability of substitutes

A factor determining demand elasticity; goods with many substitutes (like brands of cereal) are more elastic than those with few options.

Scope of the market

The breadth or narrowness of a market definition; a narrower scope (like apple juice) is more elastic because of the ease of substituting for other specific goods within the broader category (like fruit juice).

Adjustment time

A determinant of elasticity where goods are more inelastic in the short term but become more elastic over the long run as consumers or producers have more time to respond.

Midpoint method

The formula used to calculate elasticity regardless of the direction of change: $\frac{\frac{Q_{2} - Q_{1}}{(Q_{1} + Q_{2})/2}}{\frac{P_{2} - P_{1}}{(P_{1} + P_{2})/2}}$

Cross-price elasticity of demand

A measure of how the quantity demanded of one good changes when the price of a different good changes: $\frac{\text{\% change in quantity demanded of good A}}{\text{\% change in the price of good B}}$

Substitute goods (Cross-price)

Two goods that have a positive cross-price elasticity, where an increase in the price of one good leads to an increase in demand for the other.

Complement goods (Cross-price)

Two goods that have a negative cross-price elasticity, where an increase in the price of one good leads to a decrease in the demand for the other.

Income elasticity of demand

A measure of how much the quantity demanded changes in response to a change in consumers' incomes.

Normal good

A good where income elasticity is positive, and between $0$ and $1$ in proportion to income increase, meaning people buy more as they get richer.

Luxury good

A good with an income elasticity greater than $1$, meaning consumers invest a lot more in that good as their income increases.

Inferior good

A good with an income elasticity less than $0$, meaning consumers buy less of it as their income increases because they substitute toward better quality goods.

Price elasticity of supply

Measures the producer's response in quantity supplied to a change in price; this value is always positive due to the law of supply.

Total Revenue

The price paid per unit multiplied by the multiple of quantity sold ($P \times Q$).

Price effect

An effect on total revenue after a price increase where the firm earns more money from each customer who continues to buy the product.

Quantity effect

An effect on total revenue after a price increase where the firm loses revenue because fewer customers purchase the product.