Price Elasticity of Demand and Price Elasticity of Demand

Income elasticity of demand (YED)

A measure of the responsiveness of demand to changes in income. Same equation as elasticity one, but has I (Income) instead of P (Price).

Price elasticity of demand

The percentage change in quantity demanded relative to a percentage change in price.

Price elasticity of supply

The percentage change in quantity supplied divided by the percentage change in price.

Unitary elasticities

Indicate proportional responsiveness of either demand or supply, or = 1.

Revenue

Price x Quantity

Midpoint Method

A technique for calculating the percent change. In this approach, we calculate changes in a variable compared with the average, or midpoint, of the starting and final values. Edl = ((Q2-Q1)/(Q1+Q2)/2) • 100) / ((P2-P1)/(P1+P2)/2) • 100)

Elasticity

An economics concept that measures responsiveness of one variable to changes in another variable.

inelastic

An increase in price increases revenue by a larger amount when the demand curve is ________.

inferior

E for income < 0

necessity

E for income < 1

normal

E for income > 0

luxury

E for income > 1

Inelastic demand/supply

Elasticities that are less than one, indicating low responsiveness to price changes.

flatter

If demand is more elastic, demand curve is _______.

Elastic demand/supply

One in which the elasticity is greater than one, indicating a high responsiveness to changes in price.

Perfect inelasticity

The demand curve is a vertical straight line; quantity demanded remains the same regardless of price.

producer surplus

The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives.

consumer surplus

The difference between the maximum amount a person is willing to pay for a good and its current market price.

Price Elasticity

The ratio between the percentage change in the quantity demanded or supplied and the corresponding percent change in price.

Perfect elasticity

When demand/supply curve is horizontal, any change in price will result in an infinite change in quantity supplied or demanded.