Elasticities of Demand and Supply

These flashcards cover key concepts, definitions, and relationships associated with the elasticities of demand and supply as outlined in the lecture notes.

Price Elasticity of Demand

Measures the responsiveness of quantity demanded to a change in price.

Inelastic Demand

Demand with elasticity less than 1, where a percentage change in price leads to a smaller percentage change in quantity demanded.

Elastic Demand

Demand with elasticity greater than 1, where a percentage change in price leads to a larger percentage change in quantity demanded.

Perfectly Inelastic Demand

Demand where elasticity equals zero and a change in price leads to no change in quantity demanded.

Unit Elastic Demand

Demand where elasticity equals 1, meaning a percentage change in price leads to an equal percentage change in quantity demanded.

Perfectly Elastic Demand

Demand where elasticity equals infinity; any increase in price leads to zero quantity demanded.

Arc Elasticity

A method of calculating elasticity using the midpoint between two prices as the base value.

Total Revenue

The total income generated from the sale of goods, calculated as price times quantity sold.

Relationship Between Price and Total Revenue (Elastic Demand)

If price falls, total revenue increases when demand is elastic.

Relationship Between Price and Total Revenue (Inelastic Demand)

If price falls, total revenue decreases when demand is inelastic.

Cross-Price Elasticity of Demand

Measures the responsiveness of quantity demanded of one good to a change in the price of another good.

Positive Cross-Price Elasticity

Indicates that two goods are substitutes; an increase in the price of one good leads to an increase in the quantity demanded of the other.

Negative Cross-Price Elasticity

Indicates that two goods are complements; an increase in the price of one good leads to a decrease in the quantity demanded of the other.

Income Elasticity of Demand

Measures the responsiveness of quantity demanded to a change in consumer income.

Normal Good

A good for which demand increases as consumer income rises; income elasticity is positive.

Inferior Good

A good for which demand decreases as consumer income rises; income elasticity is negative.

Luxury Goods

Goods with income elasticity greater than 1; demand increases by a larger percentage than income.

Necessities

Goods with income elasticity less than 1; demand increases by a smaller percentage than income.

Perfectly Inelastic Supply

A supply curve that is vertical, indicating that the quantity supplied remains constant regardless of price changes.

Perfectly Elastic Supply

A supply curve that is horizontal, indicating that suppliers are willing to sell any quantity at a given price.

Short Run Supply

The period in which at least one factor of production is fixed; supply is less elastic.

Long Run Supply

The period in which all factors of production are variable; supply is more elastic.

Importance of Price Elasticity

Helps businesses and policymakers understand how changes in price affect demand and revenue.

Effects of Price Change on Total Revenue (Unit Elastic)

No change in total revenue when demand is unit elastic.

Visual Representation of Elastic Demand

A downward sloping curve where elasticity varies along its length.

Visual Representation of Inelastic Demand

A downward sloping curve that becomes less elastic as quantity increases.

Marginal Revenue

The additional revenue generated from selling one more unit of a good.

Law of Demand

All else being equal, as the price of a good decreases, the quantity demanded increases.

Market Structure Influence

Different market structures (perfect competition, monopoly, etc.) affect elasticity of demand and supply.

Factors Affecting Elasticity

Includes availability of substitutes, necessity vs luxury, time period, and proportion of income.

Consumer Behavior and Elasticity

Understanding how consumers respond to price changes helps in setting pricing strategies.

George Stigler

An economist known for his work on price elasticity and its implications for market behavior.

Price Elasticity Formula

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