Elasticity

Study Guide

Key Terms for Elasticity

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Key Terms for Elasticity

Buyer

Someone who purchases goods and services from a seller for money.
Competition

In a market economy, competition occurs between large numbers of buyers and sellers who vie for the opportunity to buy or sell goods and services. The competition among buyers means that prices will never fall very low, and the competition among sellers means that prices will never rise very high. This is only true if there are so many buyers and sellers that none of them has a significant impact on the market equilibrium.
Demand

Demand refers to the amount of goods and services that buyers are willing to purchase. Typically, demand decreases with increases in price; this trend can be graphically represented with a demand curve. Demand can be affected by changes in income, changes in price, and changes in relative price.
Demand Curve

A demand curve is the graphical representation of the relationship between quantities of goods and services that buyers are willing to purchase and the price of those goods and services.
Elastic

Describes a supply or demand curve which is relatively responsive to changes in price. That is, a curve wherein the quantity supplied or demanded changes easily when the price changes. A curve with an elasticity greater than or equal to 1 is elastic.
Elasticity

Refers to the degree of responsiveness a curve has with respect to price. If quantity changes easily when price changes, then the curve is elastic; if quantity doesn't change easily with changes in price, the curve is inelastic. The numerical equation to determine elasticity is:
Elasticity = (% Change in Quantity)/(% Change in Price)
If elasticity is greater than 1, the curve is elastic. If it is less than 1, it is inelastic. If it equals one, it is unit elastic.
Elasticity of demand

Refers to the degree of responsiveness a demand curve has with respect to price. If quantity drops a great deal when price goes up, then the curve is elastic; if quantity doesn't drop easily with increases in price, the curve is inelastic.
Elasticity of supply

Refers to the degree of responsiveness a supply curve has with respect to price. If quantity increases a great deal when price goes up, then the curve is elastic; if quantity doesn't increase easily with increases in price, the curve is inelastic.
Equilibrium Price

The price of a good or service at which quantity supplied is equal to quantity demanded. Also called the market-clearing price.
Equilibrium Quantity

Amount of goods or services sold at the equilibrium price. Because supply is equal to demand at this point, there is no surplus or shortage.
Goods and Services

Products or work that are bought and sold. In a market economy, competition among buyers and sellers sets the market equilibrium, determining the price and the quantity sold.
Inelastic

Describes a supply or demand curve which is relatively unresponsive to changes in price. That is, the quantity supplied or demanded does not change easily when the price changes. A curve with an elasticity less than 1 is inelastic.
Long Run

The distant future, for which buyers and sellers make "permanent" decisions, such as exiting the market or permanently decreasing consumption.
Market

A large group of buyers and sellers who are buying and selling the same good or service.
Market Economy

An economy in which the prices and distribution of goods and services are determined by the interaction of large numbers of buyers and sellers who have no significant individual impact on prices or quantities.
Market Equilibrium

Point at which quantity supplied and quantity demanded are equal, and prices are market-clearing prices, leaving no surplus or shortage.
Market-clearing Price

The price of a good or service at which quantity supplied is equal to quantity demanded. Also called the equilibrium price.
Seller

Someone who sells goods and services to a buyer for money.
Shortage

Situation in which the quantity demanded exceeds the quantity supplied for a good or service; in such a situation, the price of a good is below equilibrium price.
Short Run

The immediate future, for which buyers and sellers make "temporary" decisions, such as shutting down production or increasing consumption, for the time being.
Supply

Supply refers to the amount of goods and services that sellers are willing to sell. Typically, supply increases with increases in price, this trend can be graphically represented with a supply curve.
Supply Curve

A supply curve is the graphical representation of the relationship between quantities of goods and services that sellers are willing to sell and the price of those goods and services.
Surplus

Situation in which the quantity supplied exceeds the quantity demanded for a good or service; in this situation, the price of a good is above equilibrium price.
Unit elastic

Describes a supply or demand curve which is perfectly responsive to changes in price. That is, the quantity supplied or demanded changes according to the same percentage as the change in price. A curve with an elasticity of 1 is unit elastic.

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