ELASTICITY Flashcards
What is meant by “price elasticity of demand”?
The responsiveness of quantity demanded to a change in price (of a good or service)
How is price elasticity of demand calculated?
% change in quantity demanded (divided by)
% change in price
What is the midpoint method to calculate price elasticity of demand?
Q2 - Q1 divided by (Q1 + Q2)/2
ALL OVER
P2 - P1 divided by (P1 + P2)/2
change in quantity divided by average quantity
over change in price divided by average price
Define “elastic demand”
Elastic demand means that demand is responsive to a change in price
When price elasticity of demand is greater than one
Define “inelastic demand”
Inelastic demand means that demand is not responsive to a change in price
When price elasticity of demand is between zero and one
Define “unit elastic”
Unit elastic demand means that quantity demanded changes by the same percentage as the price
When price elasticity of demand is equal to one
Define “perfectly inelastic”
The demand for perfectly inelastic products does not respond to price changes
Define “perfectly elastic”
The demand for perfectly elastic products changes indefinitely with any change in price
How is income elasticity of demand calculated?
% change in quantity demanded divided by
% change in income
Generally, what happens to demand when income rises?
- Higher income raises the quantity demanded for normal goods (i.e. organic foods)
- Lowers the quantity demanded for inferior goods (own brand, McDonald’s coffee is inferior good to Starbucks)
What types of goods are income elastic?
Goods consumers regard as luxuries
Such as sports cars, expensive foods
What types of goods are income inelastic?
Goods consumers regard as necessities
Such as food and clothing
What is cross elasticity of demand?
Measures the responsiveness of demand for one product to a change in the price of another product
Used to identify whether the products are substitute goods or complement goods
How is cross elasticity of demand calculated?
% change in quantity of good X divided by
% change in price of good Y
When XED is a positive number = substitute goods
When XED is a negative number = complement goods
