AP Microeconomics: Elasticity, Taxes, Consumer Choice

What does elasticity measure in economics?


Response of one variable to change in another

What are the key types of elasticity?


Price elasticity of demand, supply, income elasticity

What does price elasticity of demand (PED) measure?


How quantity demanded responds to price changes

What does a PED greater than 1 indicate?


Quantity changes more than price

What does a PED less than 1 indicate?


Quantity changes less than price

What does unit elastic (PED = 1) mean?


Quantity changes as much as price

What is the formula for calculating PED?


PED = % change in QD / % change in P

What factors make demand more elastic?


More substitutes, more time, expensive goods

What is the total revenue (TR) formula?


TR = Price × Quantity

How is total revenue related to price elasticity when E > 1?


Price and TR are inversely related

How is total revenue related to price elasticity when E < 1?


Price and TR are directly related

What happens to total revenue when E = 1?


TR remains unchanged when price changes

What does perfect elasticity (PED = ∞) indicate?


Consumers are extremely sensitive to price changes

What does imperfect elasticity (PED = 0) indicate?


Quantity demanded does not change with price

What are the determinants of price elasticity of demand (PED)?


• Availability of substitutes

• Time period for adjustment

• Price level of goods (expensive vs. cheap)

• Nature of goods (necessities vs. luxuries)

How does the total revenue test relate to elasticity?


• E > 1: Price and TR inversely related

• E < 1: Price and TR directly related

• E = 1: TR unchanged when price changes