Price Elasticity of Demand

This flashcard set covers key concepts related to price elasticity of demand, including definitions, examples, and scenarios.

Price Elasticity of Demand (Ep)

A measure that indicates how much the quantity demanded of a good responds to a change in the price of that good.

Elastic Demand

Demand is considered elastic when the price elasticity of demand is greater than 1.

Inelastic Demand

Demand is considered inelastic when the price elasticity of demand is less than 1.

Unitary Elasticity

Occurs when the price elasticity of demand is equal to 1, meaning that the percentage change in quantity demanded is equal to the percentage change in price.

Calculation of Price Elasticity

Price elasticity of demand is calculated using the formula Ep = % Change in Quantity Demanded / % Change in Price.

Example of Elastic Demand

When the price of a luxury good decreases, and the quantity demanded increases significantly.

Example of Inelastic Demand

When the price of a necessity, like insulin, increases but the quantity demanded remains relatively unchanged.

Factors Affecting Elasticity

Factors include availability of substitutes, proportion of income spent on the good, and necessity versus luxury classification.

High Elasticity Scenario

Occurs when consumers significantly change their purchasing habits in response to price changes.

Low Elasticity Scenario

Occurs when consumers do not significantly change their purchasing habits despite price changes.

Elasticity equations

E_p = \frac{\text{Percent Change in Quantity Demanded}}{\text{Percent Change in Price}}