Elasticities in Product Markets

These flashcards cover key concepts related to elasticities in product markets, including definitions and relationships between demand, income, and supply.

Cross-Price Elasticity of Demand

The ratio of the percent change in the quantity demanded of one good to the percent change in the price of another good.

Income Elasticity of Demand

Measures how changes in income affect the demand for a good, defined as the percent change in quantity demanded divided by the percent change in income.

Price Elasticity of Supply

A measure of how responsive the quantity supplied of a good is to a change in the price of that good.

Normal Good

A good for which demand increases as consumer income rises, resulting in a positive income elasticity of demand.

Inferior Good

A good for which demand decreases as consumer income rises, resulting in a negative income elasticity of demand.

Substitutes

Goods that can replace each other; an increase in the price of one results in an increase in demand for the other, leading to a positive cross-price elasticity.

Complements

Goods that are consumed together; an increase in the price of one results in a decrease in demand for the other, leading to a negative cross-price elasticity.

Unit Elastic Demand

Demand is unit elastic when the price elasticity of demand equals 1, meaning percentage changes in price and quantity demanded are equal.

Inelastic Demand

Demand is inelastic when the price elasticity of demand is less than 1, meaning quantity demanded is relatively unresponsive to price changes.

Elastic Demand

Demand is elastic when the price elasticity of demand is greater than 1, meaning quantity demanded is highly responsive to price changes.