Chapter 4 Notes - Elasticity

Comprehensive vocabulary flashcards covering price elasticity of demand, total revenue relationships, income elasticity, cross elasticity of demand, and elasticity of supply from Chapter 4 Notes.

Elasticity

A measure of how sensitive people are to price changes, indicating how much consumers change their buying habits when a factor such as price changes.

Elastic Demand

A condition in which quantity demanded is very sensitive to price changes (a big reaction), changing substantially when price changes, resulting in an elasticity value greater than $1$ ($E > 1$).

Inelastic Demand

A condition in which quantity demanded is not very sensitive to price changes (a small reaction), changing only a little when price changes, resulting in an elasticity value less than $1$ ($E < 1$).

Price Elasticity of Demand

The measure of how much quantity demanded responds to price changes, calculated as $\frac{\text{Percentage change in the quantity demanded}}{\text{Percentage Change in the Price}} = \frac{\%Δ Q}{\%Δ P}$.

Unit Elastic Demand

A demand relationship where the percentage change in quantity demanded equals the percentage change in price (elasticity equals $1$), meaning price and quantity demanded change by equal percentages in opposite directions.

Unitary Elastic Demand Curve

A demand curve with an elasticity of demand ($E_d$) equal to $1$, where quantity demanded changes at the exact same percentage rate as price in opposite directions.

Elasticity Along a Linear Demand Curve

The variation of elasticity along a straight-line demand curve: prices above the midpoint are elastic ($\text{Elasticity} > 1$), the midpoint has unit elasticity ($\text{Elasticity} = 1$), and prices below the midpoint are inelastic ($\text{Elasticity} < 1$).

Perfectly Inelastic Demand

A demand relationship where quantity demanded stays exactly the same regardless of how much the price changes, always having an elasticity of $0$ and shown as a vertical demand curve.

Perfectly Elastic Demand

A demand relationship where an infinitely large change in quantity demanded occurs when price barely changes, having an elasticity of $\infty$ and shown as a horizontal demand curve.

Closeness of Substitutes

A factor influencing demand elasticity based on how easily consumers can replace one product with a similar product; goods with more close substitutes have more elastic demand, while goods with few substitutes have inelastic demand.

Proportion of Income Spent on the Good

A factor influencing demand elasticity based on product cost relative to buyer budget; goods that take up a large portion of income have more elastic demand, while goods that take up a small portion have more inelastic demand.

Time Elapsed Since a Price Change

A factor influencing demand elasticity based on the adjustment period available to consumers; demand is inelastic over a short amount of time and becomes elastic over a long amount of time.

Total Revenue (TR)

The total money a business earns from selling products, calculated using the formula $\text{Total Revenue} = \text{Quantity sold} \times \text{Price}$.

Total Revenue Test

A test used to determine whether demand is elastic, inelastic, or unit elastic by observing how total revenue changes when price increases or decreases.

Total Revenue Test: Elastic Demand

The behavior under elastic demand ($E > 1$) where price and revenue move in opposite directions: if price increases, revenue decreases; if price decreases, revenue increases.

Total Revenue Test: Inelastic Demand

The behavior under inelastic demand ($E < 1$) where price and revenue move in the same direction: if price increases, revenue increases; if price decreases, revenue decreases.

Total Revenue Test: Unit Elastic Demand

The behavior under unit elastic demand ($E = 1$) where total revenue remains constant (no change) whether price increases or decreases.

Expenditure

The amount of money spent on a good or service, calculated as $\text{Price} \times \text{Quantity bought}$.

Income Elasticity of Demand

A measure of how much buying behavior (quantity demanded) changes in response to changes in consumer income, calculated as $\frac{\text{Percentage Change in } Q_d}{\text{Percentage Change in Income}}$.

Income Elastic Demand

A condition for a normal good where income elasticity is greater than $1$, meaning the percentage increase in quantity demanded exceeds the percentage increase in income.

Income Inelastic Demand

A condition for a normal good where income elasticity is between $0$ and $1$, meaning quantity demanded increases only a bit when income increases.

Negative Income Elasticity

An income elasticity value less than $0$, indicating an inferior good for which quantity demanded decreases as income increases because consumers switch to more expensive goods.

Cross Elasticity of Demand

A measure of how much the quantity demanded of one good changes when the price of a substitute or complement changes, calculated as $\frac{\text{Percentage Change in } Q_d \text{ for good A}}{\text{Percentage Change in Price of good B}}$.

Substitutes

Goods that replace each other (e.g., Coke and Pepsi), characterized by a positive ($+$) cross elasticity where an increase in the price of good B causes the demand for good A to increase.

Complements

Goods that are used together (e.g., cars and gas), characterized by a negative ($-$) cross elasticity where an increase in the price of good B causes the demand for good A to decrease.

Unrelated Goods

Goods that do not affect each other, characterized by a cross elasticity of zero ($0$), meaning a price change in one good has no effect on the quantity demanded of the other.

Elasticity of Supply

A measure of how much quantity supplied changes when the price of a product changes, reflecting how easily businesses can adjust production, calculated as $\frac{\text{Percentage Change in } Q_s}{\text{Percentage Change in Price}}$.

Elastic Supply

A condition where the elasticity of supply is greater than $1$ ($E_s > 1$), meaning quantity supplied is very responsive to price changes and producers can easily adjust output.

Inelastic Supply

A condition where the elasticity of supply is less than $1$ ($E_s < 1$), meaning quantity supplied is not very responsive to price changes.

Elasticities of Supply Curves

Graphical curves demonstrating supply responsiveness: (a) perfectly inelastic supply ($\text{Elasticity} = 0$), (b) unit elastic supply ($\text{Elasticity} = 1$), and (c) perfectly elastic supply ($\text{Elasticity} = \infty$).

Resource Substitution Possibilities

A factor influencing supply elasticity; if resources are easy to substitute, supply is more elastic, whereas if goods require rare or unique resources that are difficult to substitute, supply is more inelastic.

Time Frame for Supply Decisions

A factor influencing supply elasticity based on the time businesses have to adjust production; supply is more inelastic in a short time frame and more elastic in a long time frame.