Elasticity of Demand Vocabulary Flashcards

Vocabulary terms and definitions related to the elasticity of demand, including price, income, and cross elasticity concepts.

Elasticity

Measures the responsiveness of one variable (quantity) to a change in another variable (price, income, price of competing products), ceretis paribus or other things equal.

Elastic

A condition where the relative change in quantity demanded is greater than the change in price, income or price of substitutes and complements.

Inelastic

A condition where the relative change in quantity demanded is less than the change in price, income or price of substitutes and complements.

Price Elasticity of Demand (PED)

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

Price Elasticity of Demand Formula

$$PED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$$

Perfectly elastic

A state where the price elasticity of demand coefficient is infinite ($PED = \infty$), and a producer will lose all revenue by increasing or decreasing price.

Perfectly inelastic

A state where the price elasticity of demand coefficient is zero ($PED = 0$), and revenue increases or decreases by the same percentage as the price change.

Unitary elasticity of demand

A state where the price elasticity of demand coefficient equals one ($PED = 1$) and a price change will not change revenue.

Relatively elastic

A state where $PED > 1$; a producer can earn more revenue by reducing price, but will earn less revenue by raising price (price and revenue move in opposite directions).

Relatively inelastic

A state where $PED < 1$; a producer can earn more revenue by increasing price, but will earn less revenue by reducing price (price and revenue move in the same direction).

Income Elasticity of Demand (YED)

Measures the responsiveness of quantity demanded following a change in income.

Income Elasticity of Demand Formula

$$YED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}$$

Normal Goods

Goods where quantity demanded increases as income increases, and YED is positive (expected to be between $0$ and $1$).

Inferior Goods

Goods where the quantity demanded decreases as income increases, resulting in a negative YED.

Necessity Goods

Goods where quantity demanded is unlikely to change when income changes, characterized by a YED close to zero.

Superior or Luxury Goods

Goods where the quantity demanded increases by more than the increase in income, resulting in a positive YED greater than $1$.

Cross Elasticity of Demand (XED)

Measures the responsiveness of quantity demanded following a change in the price of another product.

Cross Elasticity of Demand Formula

$$XED = \frac{\% \text{ change in quantity demanded for product A}}{\% \text{ change in price of product B}}$$

Cross Elastic

A condition where the quantity demanded for one product increases proportionately more as the price of another changes ($XED > 1$).

Cross Inelastic

A condition where the quantity demanded for one product increases proportionately less as the price of another changes ($XED < 1$).

Substitutes (XED)

Products categorized by a positive Cross Elasticity of Demand ($XED$).

Complements (XED)

Products categorized by a negative Cross Elasticity of Demand ($XED$).

Habit-forming goods

Products to which people are addicted (e.g., cigarettes), often leading to low elasticity of demand.