Chapter 19 Definitions Flashcards
The responsiveness in the quantity demanded of a commodity to changes in its price;
Ep = (percentage change in quantity demanded)/(percentage change in price)
Price elasticity of Demand
A demand relationship in which a given percentage change in price will result in a larger percentage change in quantity demanded
A negative relationship exists between changes in price and changes in total revenues. Along the elastic range of market demand for an item, total revenues will rice if the market price decreases. Total revenues will fall if the market price increases
Elastic Demand
A demand relationship in which the quantity demanded changes exactly in proportion to the change in price
Changes in price do not change total revenues. When price increases along the unit-elastic range of market demand, total revenues will not change, nor will total revenues change if the market price decreases.
Unit elasticity of demand
A demand relationship in which a given percentage change in price will result in a less-than-proportionate percentage change in the quantity demanded
A positive relationship exists between changes in price and total revenues. When increases along the inelastic range of market demand for an item, total revenues will go up. When the market price decreases, total revenues will fall. We therefore conclude that if a demand is inelastic price and total revenues move in the same direction
Inelastic demand
A demand that exhibits zero responsiveness to price changes. No matter what the price is, the quantity demanded remains the same
Perfectly inelastic demand
A demand that has the characteristic that even the slightest increase in price will lead to zero quantity demanded
Perfectly elastic demand
Demand elasticity tends to be more inelastic because consumers have limited ability to substitute or adjust their behavior immediately
Supply tends to be more inelastic because firms are constrained by factors like existing infrastructure and limited production time
Short-run elasticity
Demand is more elastic because consumers have more time to find alternatives, adjust their consumption habits, and make changes based on price shifts
Supply is typically more elastic because firms have more time to adjust all factors of production
Long Run elasticity
Exy = (percentage change in the amount of good x demanded)/(percentage change in price of good Y)
Cross price elasticity of demand
When two goods are substitutes, the cross price elasticity of demand will be…
positive
When two related goods are complements, the cross price elasticity of demand will be…
negative
If two goods are completely unrelated, their cross price of elasticity of demand will be
zero
The responsiveness of the amount of a good demanded to a change in income, holding the good’s relative price constant
Ei= (percentage change in amount of a good demanded)/(percentage change in income)
Income elasticity of demand
The responsiveness of the quantity supplied of a commodity to its change in price
Es = (percentage change in quantity supplied)/(percentage change in price)
Price elasticity of supply
A supply characterized by a reduction in quantity supplied to zero when there is the slightest decrease in price
Perfectly elastic supply
A supply for which quantity supplied remains constant, no matter what happens to price
Perfectly inelastic supply
Tax incidence: if demand is more elastic than supply, the party that bears a larger portion of the tax burden is the
producers because consumers can easily switch to alternatives or reduce their consumption
If Demand is more inelastic than supply, the party that bears a larger portion of the tax burden is the
consumers because they are less likely to change their consumption behavior.
