elasticity of demand Flashcards
(12 cards)
What is elasticity of demand?
Elasticity of demand measures how much the quantity demanded of a good responds to changes in its price.
What is the formula for calculating price elasticity of demand (PED)?
The formula for PED is:
PED = % Change in Quantity Demanded / % Change in Price
What does it mean if demand is elastic?
If demand is elastic, it means that a small change in price leads to a large change in the quantity demanded (PED > 1).
What does it mean if demand is inelastic?
If demand is inelastic, it means that a change in price has little effect on the quantity demanded (PED < 1).
What does unitary elasticity mean?
Unitary elasticity means that a change in price causes a proportional change in quantity demanded (PED = 1).
What are some factors that affect the elasticity of demand?
The main factors include:
- Availability of substitutes: More substitutes make demand more elastic.
- Necessities vs. luxuries: Necessities tend to have inelastic demand, while luxuries are more elastic.
- Time period: Demand tends to be more elastic over the long term than in the short term.
What does it mean if demand is perfectly elastic?
Perfectly elastic demand means that consumers will only buy at one price; any increase in price will cause the quantity demanded to fall to zero (PED = ∞).
What does it mean if demand is perfectly inelastic?
Perfectly inelastic demand means that quantity demanded does not change regardless of price (PED = 0).
How does elasticity affect total revenue?
If demand is elastic, lowering the price increases total revenue.
If demand is inelastic, raising the price increases total revenue.
If demand is unitary, total revenue remains unchanged when the price changes.
What is cross-price elasticity of demand?
Cross-price elasticity measures how the quantity demanded of one good responds to a change in the price of another good. It can indicate whether goods are substitutes (positive elasticity) or complements (negative elasticity).
What is income elasticity of demand?
Income elasticity of demand measures how the quantity demanded of a good changes as consumer income changes. Positive elasticity means the good is a normal good (demand increases with income), while negative elasticity means the good is an inferior good (demand decreases with income).
What is the formula for Elasticity of Deman
%ChangeinQuantityDemanded/% change in prices
