Elasticity of Demand Flashcards
What is Elasticity of Demand?
Elasticity of demand refers to the change in quantity demanded in relation to price.
When does Elastic Demand occur? What is the nature of the incline of the curve?
Elastic demand occurs when the negative change in a product’s quantity demanded is greater than an increase in price ceteris parabus and vice versa. It is usually represented by a “flatter” demand curve.
When does inelastic demand occur? What is the nature of the incline of the curve?
Inelastic demand occurs when the change in a product’s quantity demanded is less than a change in price. It is usually represented by a “taller” demand curve.
How does Quantity react to price for inelastic goods?
- Quantity is INSENSITIVE to price change
What happens to the purchase of inelastic goods when there is a change in price?
People will continue to buy the product, and the same amount of the product despite fluctuating pricing. If price increases, demand will decrease a little. And if price decreases, demand will increase a little bit. Ceteris Parabus.
Determinants of Price elasticity of demand (PED)
- The availability of substitutes
- Whether it is a luxury or necessity
- Time (In the short term, products are more inelastic; over time more elastic because more substitutes are found.
- Proportion of Income spent (a good that was a lower proportion of income tends to be inelastic).
Perfect inelasticity number
0
> 1 and <1 meaning.
More than 1 means Elastic
Less than 1 means Inelastic
What is unitary elasticity?
1
What is Total Revenue?
Total Revenue refers to the total amount of income business or firms gain from selling a good or service.
Do producers want to have elastic or inelastic goods and why? What is the effect?
A business wants to sell more inelastic goods. This means that consumers will not react as much to an increase in price. This will increase revenue and profit.
