Demand Elasticity Lecture Notes

These flashcards cover key vocabulary terms and concepts related to demand elasticity, providing definitions for each term.

Elasticity

Measures the responsiveness of one variable to changes in another variable.

Price Elasticity of Demand

Measures the responsiveness of quantity demanded to changes in a good’s own price.

Determinants of Demand Elasticity

Factors that influence the elasticity of demand include the availability of substitutes, the time period considered, and the proportion of income spent on the good.

Inelastic Demand

Demand is inelastic when the absolute value of elasticity is less than 1.

Elastic Demand

Demand is elastic when the absolute value of elasticity is greater than 1.

Unit Elastic Demand

Demand is unit elastic when the absolute value of elasticity equals 1.

Perfectly Elastic Demand

A situation where a small percentage change in price causes an extremely large percentage change in quantity demanded.

Perfectly Inelastic Demand

A situation where quantity demanded does not change as price changes.

Total Revenue (TR)

Total revenue equals the price of a good times the quantity of the good sold (TR = P x Q).

Relationship Between Price and Total Revenue

For elastic demand, price increases lead to lower total revenue; for inelastic demand, price increases lead to higher total revenue.

Example of Elastic Demand

Breakfast cereal has close substitutes, so a price rise would cause a significant drop in quantity demanded.

Example of Inelastic Demand

Insulin is a necessity, so a price rise would cause little or no decrease in demand.

Impact of Time on Elasticity

Demand tends to be more elastic in the long run compared to the short run.

Price Elasticity Formula

Price elasticity of demand = % change in quantity demanded / % change in price.