Price Elasticity of Demand, Supply, and Related Elasticity Concepts

Vocabulary flashcards reviewing price elasticity of demand, cross-price elasticity, income elasticity, price elasticity of supply, their determinants, and total revenue relationships.

Price Elasticity of Demand (PED)

Measures how responsive the quantity demanded of a good is to a change in its price, calculated as percentage change in quantity demanded divided by percentage change in price.

Elastic Demand

Demand where quantity demanded is highly responsive to price changes, meaning the percentage change in quantity demanded is greater than the percentage change in price ($|PED| > 1$).

Inelastic Demand

Demand where quantity demanded is not very responsive to price changes, meaning the percentage change in quantity demanded is smaller than the percentage change in price ($|PED| < 1$).

Unit-Elastic Demand

Demand where the percentage change in quantity demanded equals the percentage change in price ($|PED| = 1$).

Midpoint Formula

A formula calculating elasticity using average initial and final values to ensure the same value is obtained whether price rises or falls.

Perfectly Inelastic Demand

Demand where quantity demanded does not change at all when price changes ($PED = 0$), represented by a vertical demand curve.

Perfectly Elastic Demand

Demand where consumers are infinitely responsive to price changes ($PED = \infty$), represented by a horizontal demand curve.

Total Revenue (TR)

The total amount of money a firm receives from selling a product or service, calculated as $\text{Total Revenue} = \text{Price} \times \text{Quantity sold}$.

Elastic vs Inelastic Demand Curves

When two demand curves intersect, the flatter curve is more elastic ($D_1$) and the steeper curve is less elastic ($D_2$).

Relationship Between Elasticity and Total Revenue

When demand is inelastic, reducing price decreases total revenue; when demand is elastic, reducing price increases total revenue.

Determinants of Price Elasticity of Demand

The five main factors determining PED: availability of close substitutes, passage of time, luxury versus necessity, definition of the market, and share of expenditure in the consumer's budget.

Cross-Price Elasticity of Demand

Measures how responsive the quantity demanded of one good is to a change in the price of another good.

Substitutes (Cross-Price Elasticity)

Goods where an increase in the price of one leads to an increase in demand for the other, yielding a positive cross-price elasticity.

Complements (Cross-Price Elasticity)

Goods that are used together, where an increase in the price of one leads to a decrease in demand for the other, yielding a negative cross-price elasticity.

Cross-Price Elasticity Classifications

Summary classification of products based on cross-price elasticity values: positive for substitutes, negative for complements, and zero for unrelated goods.

Income Elasticity of Demand

Measures how responsive quantity demanded is to changes in consumer income, calculated as percentage change in quantity demanded divided by percentage change in income.

Normal Good

A good where demand increases as consumer income increases, characterized by a positive income elasticity of demand.

Luxury Good

A normal good where demand is highly responsive to income changes, having an income elasticity of demand positive and greater than $1$.

Necessity Good

A normal good where demand increases only slightly when income rises, having an income elasticity of demand positive but less than $1$.

Inferior Good

A good where demand decreases when consumer income increases, characterized by a negative income elasticity of demand.

Income Elasticity Summary

Summary classification of goods by income elasticity: positive but less than $1$ for necessities, positive and greater than $1$ for luxuries, and negative for inferior goods.

Price Elasticity of Supply (PES)

Measures how responsive the quantity supplied of a good or service is to a change in its price, calculated as percentage change in quantity supplied divided by percentage change in price.

Elastic Supply

Supply where producers are highly responsive to price changes, meaning percentage change in quantity supplied is greater than percentage change in price ($PES > 1$).

Inelastic Supply

Supply where producers are not very responsive to price changes, meaning percentage change in quantity supplied is smaller than percentage change in price ($PES < 1$).

Perfectly Inelastic Supply

Supply where quantity supplied does not change regardless of price ($PES = 0$), represented visually by a vertical supply curve.

Determinants of Price Elasticity of Supply

Key factors determining PES: passage of time, type of industry, availability of inputs, existing production capacity, and inventories held.