Glossary
Elastic Demand
Occurs when the percentage change in quantity demanded is greater than the percentage change in price, meaning consumers are highly responsive to price changes.
Example:
The demand for designer clothing is often elastic demand; a small price increase can lead to a large drop in sales as consumers opt for cheaper alternatives.
Elasticity
A general concept in economics that measures the responsiveness of one variable to a change in another.
Example:
The elasticity of a rubber band determines how much it stretches when pulled, similar to how quantity demanded responds to price changes.
Inelastic Demand
Occurs when the percentage change in quantity demanded is less than the percentage change in price, meaning consumers are not very responsive to price changes.
Example:
Demand for life-saving prescription drugs is typically inelastic demand because people will purchase them regardless of price increases due to necessity.
Perfectly Elastic Demand
A theoretical extreme where consumers will demand an infinite quantity at a specific price, but none at a slightly higher price ($E_d = ∞$).
Example:
In a perfectly competitive market, a single farmer's demand for their corn is perfectly elastic demand because they can sell all they want at the prevailing market price, but nothing above it.
Perfectly Inelastic Demand
A theoretical extreme where the quantity demanded does not change at all, regardless of any price change ($E_d = 0$).
Example:
For a diabetic, the demand for insulin is considered perfectly inelastic demand as they need a specific amount to survive, regardless of its cost.
Price Elasticity of Demand (PED)
A measure of how sensitive the quantity demanded of a good is to a change in its price.
Example:
If the price of luxury vacations increases significantly, people might drastically reduce their travel plans, indicating a high Price Elasticity of Demand.
Price Elasticity of Demand Coefficient ($E_d$)
The numerical value calculated using the PED formula, indicating the magnitude of consumer responsiveness to price changes.
Example:
If the price elasticity of demand coefficient for gasoline is -0.3, it means a 10% price increase would only lead to a 3% decrease in quantity demanded.
Price-sensitive
Describes consumers whose purchasing decisions are significantly influenced by changes in the price of a good or service.
Example:
A college student on a tight budget is often very price-sensitive when buying groceries, always looking for sales and discounts.
Relatively Elastic Demand
A type of elastic demand where the percentage change in quantity demanded is greater than the percentage change in price (1 < $E_d$ < ∞).
Example:
The demand for gourmet coffee is often relatively elastic demand; a small price increase might cause many customers to switch to a cheaper brand or brew at home.
Relatively Inelastic Demand
A type of inelastic demand where the percentage change in quantity demanded is less than the percentage change in price (0 < $E_d$ < 1).
Example:
The demand for basic utilities like water is often relatively inelastic demand; even if the price goes up slightly, people still need to use it for daily necessities.
Slope (of the demand curve)
The steepness of the demand curve, representing the absolute change in price divided by the absolute change in quantity, which is distinct from elasticity.
Example:
A very steep demand curve indicates that a large price change results in only a small absolute quantity change, but its slope is not the same as its elasticity, which varies along the curve.
Total Revenue (TR)
The total amount of money a firm receives from selling its goods or services, calculated by multiplying the price per unit by the quantity sold (TR = P * Q).
Example:
If a local bakery sells 200 loaves of artisan bread at 1000.
Total Revenue Test
A method used to determine the elasticity of demand by observing how total revenue changes in response to a change in price.
Example:
If a video game company lowers the price of a popular game and its total revenue test shows an increase in total revenue, it suggests the demand for that game is elastic.
Unit Elastic Demand
Occurs when the percentage change in quantity demanded is exactly equal to the percentage change in price ($E_d = 1$).
Example:
If a 15% price increase for movie tickets leads to an exact 15% decrease in tickets sold, it demonstrates unit elastic demand.