Elasticity off supply and demand Flashcards
The price elasticity of demand (Ed)
Price elasticity of demand measures the product’s sensitivity to price changes, indicating the percentage change in quantity demanded if the price of a good or service increases by one percent.
Calculating the price elasticity of demand
Price elasticity of demand is determined by dividing quantity change by product price change, indicating a product’s sensitivity to price changes.
Perfectly inelastic demand
Perfectly inelastic demand occurs when a price change doesn’t affect the quantity demanded, with the price elasticity coefficient equal to zero. This means consumers plan to buy a fixed quantity at a specific price.
Relatively inelastic demand
A relatively inelastic demand curve, represented by a steep curve, encourages producers to increase product prices to increase sales income, as a 10% increase in product price leads to a 2% decrease in quantity demanded.
Unit elastic demand
The demand curve is unit elastic when the price elasticity coefficient equals one, ensuring producers’ sales income remains constant as the quantity demanded decreases proportionally with product price increase.
relatively elastic demand
The elasticity coefficient (Ed > 1) indicates that a decrease in product prices leads to a larger than proportionate increase in quantity demanded, thus increasing sales income.
Perfectly elastic demand
A perfectly elastic demand curve has an infinitely large elasticity coefficient, indicating that the average change in product quantity is larger than price change.
substitution good
a product that consumers can substitute for another to meet a specific need
complementary good
are products used together to fulfill a specific need or want, such as tea, sugar, milk
nature of the commodity
The demand for necessities, like food and shelter, remains inelastic, while luxury goods, like expensive vehicles and technology, provide comfort but are not essential for survival.
