Price Elasticity and Demand

These flashcards cover key concepts related to price elasticity, income elasticity, and cross-elasticities of demand, helping students grasp the fundamental principles of microeconomics.

What is the price elasticity of demand (PED)?

The responsiveness of a change in demand to a change in price.

What formula represents price elasticity of demand?

PED = % change in quantity demanded / % change in price.

What numerical value indicates a price elastic good?

PED > 1.

What numerical value indicates a price inelastic good?

PED < 1.

What does PED = 1 indicate?

A unitary elastic good, where the change in demand equals the change in price.

What does a PED of 0 indicate?

A perfectly inelastic good, where demand does not change when price changes.

What does a PED of infinity indicate?

A perfectly elastic good, where demand falls to zero when price changes.

If the price of bread increased by 15% and quantity demanded decreased by 20%, what is the PED?

-1.33, indicating that bread is price elastic.

What factor affects PED due to necessity of a product?

Necessary goods, like bread, have relatively inelastic demand.

How do substitutes influence PED?

More substitutes lead to more price elastic demand.

What happens to PED over the long run?

Demand becomes more price elastic as consumers find substitutes over time.

How does addiction influence PED?

Addictive goods, like cigarettes, have inelastic demand regardless of price changes.

How does the proportion of income spent on a good affect its PED?

A higher proportion of income spent leads to more elastic demand.

What effect do peak and off-peak demand have on PED?

Demand tends to be more price inelastic during peak times.

How does elasticity of demand relate to tax burdens?

The burden of tax falls more on consumers for inelastic goods and on producers for elastic goods.

What is a subsidy in economic terms?

A payment from the government to firms to encourage production and lower average costs.

What is total revenue (TR) formula?

TR = Price (P) x Quantity sold (Q).

What happens to a firm's revenue if it raises the price of an inelastic good?

Total revenue increases as quantity sold does not fall significantly.

What are inferior goods?

Goods that see a fall in demand as income increases (e.g., value options at supermarkets).

What are luxury goods?

Goods for which demand increases more than proportionally as income rises (YED > 1).

What is cross elasticity of demand (XED)?

The responsiveness of a change in demand of one good to a change in price of another good.

What do complementary goods exhibit in terms of XED?

Negative XED; an increase in price of one reduces demand for the other.

What defines strong and weak complements?

Strong complements exhibit large increases in demand with small price decreases; weak complements have smaller increases.

What happens with substitutes in terms of XED?

Positive XED; an increase in price of one leads to increased demand for the other.

What is XED for unrelated goods?

XED = 0; price changes of one have no effect on the other.