Elasticity Lecture Notes

These flashcards cover the key concepts surrounding elasticity, including definitions, formulas, examples, and the determinants that affect elasticity.

What is elasticity in economics?

A measure of the responsiveness of buyers and sellers to changes in price or income.

What does the price elasticity of demand measure?

It measures the responsiveness of quantity demanded to a change in price.

What happens if the price of Snickers bars increases by 25%?

It affects the consumer's purchase behavior toward Snickers bars.

What is the midpoint formula used for?

It is used to calculate elasticity and provides a consistent estimate regardless of the direction of price change.

What characterizes perfectly elastic demand?

If |ED| = ∞, then demand is perfectly elastic; consumers are extremely sensitive to price changes.

How is elastic demand defined in terms of elasticity?

If ∞>|ED| > 1, demand is elastic; a price increase results in a greater than proportional decrease in quantity demanded.

What does inelastic demand imply about consumer behavior?

If 1>|ED| > 0, then demand is inelastic; consumers are not very sensitive to price changes.

What is perfectly inelastic demand?

If |ED| = 0, then demand is perfectly inelastic; consumers are not at all sensitive to price changes.

What affects elasticity regarding substitutes?

The more substitutes available, the higher the elasticity of demand; consumers are more responsive to price changes.

How does the proportion of income expended influence elasticity?

The higher the proportion of income spent on a product, the greater the elasticity of demand.

What role does time play in elasticity?

Given more time, consumers can better adjust their quantity demanded in response to price changes.

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

Total revenue decreases when price increases in elastic demand.

If demand is unit elastic, what happens to total revenue with a price change?

Total revenue remains the same with a price change.

What can we infer about necessities and luxuries in terms of elasticity?

Necessities tend to have inelastic demand, while luxuries tend to have elastic demand.

What is an example of a product that has perfectly inelastic demand?

Insulin for severe diabetics; no adequate substitutes are available.