day 7 part 2 Economics: Principles of Elasticity

These flashcards cover the fundamental vocabulary and mathematical conditions associated with price elasticity of demand, responsiveness types, and revenue strategies identified in the lecture.

Elasticity

A general economic term referring to how much one economic variable responds to changes in another.

Elastic

A term used to describe a situation where one economic variable is highly responsive to changes in another.

Inelastic

A term used to describe a situation where one economic variable is unresponsive to changes in another.

Price Elasticity of Demand

A measure answering how much quantity demanded changes when a good's price changes; mathematically it is the $\frac{\text{percentage change in quantity demanded}}{\text{percentage change in price}}$.

Cross Price

Refers to the impact of the price of other goods, specifically substitutes or complements, on the quantity demanded of a specific good.

Income Elasticity

The measure of how much quantity demanded responds to changes in income, often used to categorize goods as normal or inferior.

Law of Demand (Elasticity context)

The principle that causes price elasticity of demand to almost always be negative, because percentage change in quantity and percentage change in price move in opposite directions.

Perfectly Inelastic Demand

An extreme case where quantity demanded is not responsive to price changes at all, resulting in a vertical demand curve and an elasticity value of $0$.

Perfectly Elastic Demand

An extreme case where demand is infinitely elastic and the entire demand curve is flat/horizontal, meaning any amount can be sold at a specific price but none at any other price.

Steepness and Elasticity

The flatter the demand curve, the more elastic the demand; the steeper the demand curve, the more inelastic the demand.

Elastic Demand (Mathematical Definition)

A condition where the percentage change in quantity demanded is larger than the percentage change in price, resulting in an absolute elasticity value greater than $1$ ($|EP| > 1$).

Inelastic Demand (Mathematical Definition)

A condition where the percentage change in quantity demanded is smaller than the percentage change in price, resulting in an absolute elasticity value less than $1$ ($|EP| < 1$).

Unit Elastic Demand

A case where the percentage change in quantity demanded exactly equals the percentage change in price, meaning the absolute value of elasticity is exactly $1$ ($|EP| = 1$).

Earnings Strategy (Inelastic)

If a firm faces inelastic demand (consumers are not sensitive to price), the optimal strategy to increase earnings is to increase prices.

Earnings Strategy (Elastic)

If a firm faces elastic demand (consumers are highly responsive to price), the optimal strategy to increase revenue is to cut prices.