Economics - Price Elasticity of Demand

Flashcards to aid in understanding key concepts in the study of price elasticity of demand in economics.

Demand

The quantity that consumers are willing and able to buy at each price level.

Law of Demand

The principle stating that when the price of a good falls, the quantity demanded rises, and when the price rises, the quantity demanded falls.

Elasticity of Demand

The measure of how the quantity demanded of a good reacts to a change in price.

Price Elasticity of Demand (PED)

Measures the change in quantity demanded relative to a change in price.

Contraction of Demand

A decrease in the quantity demanded due to an increase in price.

Extension of Demand

An increase in the quantity demanded due to a decrease in price.

Total Expenditure (TE)

The total amount spent on a good, calculated as price times quantity (TE = P x Q).

Elastic Demand

Occurs when a change in price leads to a proportionately larger change in quantity demanded (elasticity > 1).

Inelastic Demand

Occurs when a change in price leads to a proportionately smaller change in quantity demanded (elasticity < 1).

Unit Elastic Demand

Occurs when price and quantity demanded change by the same proportion (elasticity = 1).

Substitutes

Goods that can be used in place of one another; when one price rises, the demand for the other typically increases.

Necessities vs Luxuries

Necessities tend to have inelastic demand, while luxuries tend to have elastic demand.