Income Effects, Substitution Effects, & Elasticity

These flashcards cover key concepts related to income effects, substitution effects, and elasticity in consumer choice theory.

Law of Demand

As price decreases, quantity demanded increases, and vice versa.

Substitution Effect

Change in quantity demanded due to a change in the price of a good, where consumers replace more expensive items with cheaper alternatives.

Income Effect

Change in quantity demanded resulting from a change in consumers' purchasing power due to price changes.

Elasticity

Measure of how much quantity demanded responds to a change in price.

Inelastic Demand

Demand that is insensitive to price changes, where quantity demanded changes little with price changes.

Elastic Demand

Demand that is sensitive to price changes, where quantity demanded changes significantly with price changes.

Giffen Goods

Inferior goods for which demand increases as price increases, violating the law of demand.

Perfectly Inelastic

Condition where quantity demanded does not change regardless of price changes; elasticity coefficient is 0.

Perfectly Elastic

Condition where quantity demanded changes indefinitely with any price change; elasticity coefficient is infinity.

Unit Elastic

Condition where the percentage change in quantity demanded is equal to the percentage change in price; elasticity coefficient is 1.