Chapter 6: Elasticity Lecture Notes

A set of vocabulary flashcards covering the definitions, formulas, and determinants of demand, supply, cross, and income elasticity based on the Chapter 6 lecture.

Price Elasticity of Demand

Measures buyers’ responsiveness to price changes.

Elastic Demand

Demand that is sensitive to price changes, resulting in a large change in quantity demanded. The coefficient is $E_d > 1$.

Inelastic Demand

Demand that is insensitive to price changes, resulting in a small change in quantity demanded. The coefficient is $E_d < 1$.

Price Elasticity of Demand Formula ($E_d$)

$$E_d = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}$$

Midpoint Formula

A calculation method used for price elasticity to ensure consistent results regardless of the direction of the price change.

Unit Elasticity

A situation where the percentage change in quantity demanded is equal to the percentage change in price, resulting in an elasticity coefficient of $E_d = 1$.

Perfectly Inelastic Demand

A situation where demand is completely unresponsive to price changes, resulting in a coefficient of $E_d = 0$ and a vertical demand curve.

Perfectly Elastic Demand

A situation where a small price change results in an infinite change in quantity demanded, resulting in a coefficient of $E_d = \text{∞}$ and a horizontal demand curve.

Total Revenue (TR)

The total amount of money received by a firm from the sale of its product, calculated as $Price \times Quantity$.

Total Revenue Test (Inelastic Demand)

When demand is inelastic, Price ($P$) and Total Revenue ($TR$) move in the same direction.

Total Revenue Test (Elastic Demand)

When demand is elastic, Price ($P$) and Total Revenue ($TR$) move in opposite directions.

Substitutability

A determinant of elasticity stating that the more substitutes available for a product, the more elastic its demand will be.

Proportion of Income

A determinant of elasticity stating that the higher the proportion of consumer income spent on a good, the more elastic the demand for that good will be.

Price Elasticity of Supply ($E_s$)

Measures sellers’ responsiveness to price changes, calculated as $E_s = \frac{\text{Percentage change in quantity supplied}}{\text{Percentage change in price}}$.

Immediate Market Period

A time period in which producers are unable to respond to a change in price, resulting in a perfectly inelastic supply.

Short Run (Supply)

A time period where supply is more elastic than the immediate market period because firms have some time to adjust production.

Long Run (Supply)

A time period where supply is most elastic because firms have enough time to fully adjust all resources and production levels.

Cross Elasticity of Demand ($E_{xy}$)

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

Substitute Goods (Cross Elasticity)

Goods that have a positive cross elasticity of demand ($E_{wz} > 0$), meaning the quantity demanded of one changes in the same direction as the price of the other.

Complement Goods (Cross Elasticity)

Goods that have a negative cross elasticity of demand ($E_{xy} < 0$), meaning the quantity demanded of one changes in the opposite direction from the price of the other.

Income Elasticity of Demand ($E_i$)

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

Normal Goods

Goods with a positive income elasticity coefficient ($E_i > 0$), where demand increases as income increases.

Inferior Goods

Goods with a negative income elasticity coefficient ($E_i < 0$), where demand decreases as income increases.

Pricing Power

The ability of a firm to charge different prices to different buyers based on their various price elasticities of demand.