Key Terms
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Hereunder is a brief explanation of the Elasticity Key Terms used in this Website. 

  • Also included are some other terms used throughout the site but which do not relate exclusively to Elasticity

A      C     D    E    G    H    I     J    L     N    O     P    R     S    T     U    Y

A

Absolute terms

The value of a number when its sign is ignored.  If the result of a formula results in -0.3, the absolute value of that number is 0.3

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All other things being equal

In Economics, only one variable is tested at a time, therefore all other possible variables are held constant.  Example: We say that when the price of a good rises less will tend to be bought, all other things being equal.  What is being measured in this statement is what happens to the quantity demanded when the price changes - changes in income, taste, quality etc. are not taken into account.  The Latin phrase used for "All other things being equal" is "Ceteris Paribus"

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Arc Elasticity of Demand

Arc Elasticity measures the elasticity between two points on an Arc.  An arc is a portion of a curve.  Using the Arc Elasticity formula eliminates the possibility of two apparently correct answers depending on whether the price has risen or fallen

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C

CED

Cross Elasticity of Demand.  This measures the proportionate change in quantity demanded of one good in response to a change in price of another good.  If there is to be cross elasticity, there must be some relationship between the two goods in question.  They must be either competitive (or substitutes for each other) or they must be complementary goods which are used in conjunction with each other

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Coefficient

This is the result you get when you work out the Formula to measure elasticity.  The significance of the number is that if it is less than 1 (in absolute terms) it means inelasticity;  if it is greater than 1 (in absolute terms) it signifies elasticity;   if it is equal to 1 (in absolute terms) unity or unitary elasticity is achieved

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Competitive

Competitive goods are also known as substitute goods, i.e., goods that may be readily substituted one for the other.  These are similar goods which are on a supermarket shelf competing for a place in your shopping trolley

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Complementary Goods

Complementary goods are goods which are used in conjunction with each other.  The demand for one has an effect on the demand for the other.  They are also known as goods in Joint Demand

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Cross Elasticity of Demand

Cross Elasticity of Demand.  This measures the proportionate change in quantity demanded of one good in response to a change in price of another good.  If there is to be cross elasticity, there must be some relationship between the two goods in question.  They must be either competitive (or substitutes for each other) or they must be complementary goods which are used in conjunction with each other

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D

Delta

The fourth letter of the Greek alphabet.  In Mathematics and in Economics it is used as a symbol to indicate "change in" .  We say "delta quantity" when we mean "the change in quantity"

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Demand

Demand means the quantity of a good which will be purchased at a given price.  In Economics, Demand is taken to mean "Effective Demand", i.e., demand backed up by purchasing power

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Demand Curve

A demand curve plots the different quantities of a good which will be purchased at different prices.  It is more useful than the demand schedule or table which is used to generate it because,  with a curve, it is possible to determine what quantity will be demanded at any given price within the scale of the graph

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E

Elastic

The application of the formula results in an answer which is greater than 1 in absolute terms.  The greater the number, the greater the degree of elasticity

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Elasticity

Elasticity is used to measure what percentage change in quantity demanded/supplied will occur if there is a 1% change in price.  Businesses use elasticity to determine whether they will have an increase/decrease in revenue because of a price increase they impose.   The Minister for Finance uses Elasticity to determine whether an increase in VAT or excise duty will result in an increase of revenue to the Exchequer

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G

Giffen Good

A Giffen Good is a good for which the demand rises as price rises.  It, therefore, has an upward sloping left to right Demand Curve showing that the higher the price, the more will tend to be demanded.  This Giffen Good demand curve is known as a perverse demand curve because it does not follow the usual downward-sloping left to right format.   Bread is a classic example of a Giffen Good.  Goods bought for snob value (conspicuous consumption) and goods the price of which is expected to further rise could   also be classed as Giffen Goods

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H

Hyperbola, Rectangular

This is the slope of the Demand Curve when unity is achieved. It shows that for every 1% increase in price there will be a corresponding 1% decrease in demand - resulting in the same amount of revenue being earned.  The rectangular area from any given point on the  hyperbola to the two axes is equal to the rectangular area from any other given point on the hyperbola.  This shows that, regardless of price, the revenue will be the same when a good has unitary elasticity.

The Average Fixed Cost curve is also a rectangular hyperbola

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I

Income Elasticity of Demand

Measures the proportionate change in quantity demanded caused by a change in income of the population.  The formula used to calculate it is the same as the formula used to calculate Price Elasticity of Demand - however, the sign will always be positive for Normal Goods

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Income, Nominal

The amount of money one receives from the provision of a factor of production (Land, Labour, Capital, or Enterprise) expressed in terms of the amount (i.e. number of Euro) of income received

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Income, Real

The amount of money one receives from the provision of a factor of production expressed in terms of the purchasing power of that income.  One could get a 5% increase in nominal income, but suffer a 1% loss in real income (purchasing power) if inflation rises to 6%

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Inelastic

The application of the formula results in an answer which is less than 1 in absolute terms.   The nearer the number is to zero, the greater the degree of inelasticity

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Inferior Good

An Inferior Good is any good which is not a Normal Good.  It therefore includes all Giffen goods.  However, while all Giffen goods are Inferior goods, not all Inferior goods are Giffen goods. The classic textbook example of an Inferior good is a remould tyre which has a negative income effect.  This means that less of them will tend to be bought when income rises

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Infinity

Infinity cannot be written down because there are not enough particles in the universe to do so.   However, we use the concept of moving towards infinity in economics to demonstrate both  Perfect Elasticity and Perfect Competition

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J

Joint Demand

Joint Demand goods are goods which are used in conjunction with each other.  The demand for one has an effect on the demand for the other.  They are also known Complementary Goods

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L

Linear

When we plot a demand or supply curve from given data, it is assumed that there is a correspondence between any two given points.  In other words, the two given points can be joined with no major deviational pattern occurring between them

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N

Negative

The minus sign is negative.  The sign for Normal Goods under Price Elasticity of Demand will always be negative.  The sign for Inferior Goods under Income Elasticity of Demand will always be negative. The sign for Complementary Goods under Cross Elasticity of Demand  will always be negative

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Normal Goods

Normal Goods are goods which have a negative demand effect and a positive income effect.  That means that more will be demanded as price falls (negative demand effect) and that more will be demanded as income rises (positive income effect)

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O

Origin

The bottom left hand corner point of a positive graph, i.e., where the X and Y axes are equal to zero.  Any supply curve going through the Origin has Unitary Elasticity of Supply

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P

PED

An abbreviation for Perfect Elasticity of Demand

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Perfect

The ideal state - which probably does not exist in any sphere. In Economics we assume Perfection in Elasticity and in Competition.  We acknowledge that it probably does not exist, but use the theoretical concept as a benchmark to see how far away from perfection Elasticity or Competition has deviated

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Perfect Elasticity

Perfect Elasticity, if it were to exist, means that an infinite quantity would be demanded at a given price, and that none would be demanded at any other price.  Hence there would be a horizontal demand curve moving towards infinity.  It is, of course, a nonsense because if a consumer is willing to demand a good at �x, the consumer (if acting rationally) is also willing to demand that same good at �x-1. 
The application of the formula for measuring Price Elasticity of Demand results in infinity

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Perfect Inelasticity

Perfect Inelasticity, if it were to exist, means that the same quantity, Q, would be demanded regardless of the price of the good.  One could argue that food has Perfect Inelasticity because it is necessary for survival, and that is true while we consider food in a generic manner.  But nobody could argue that the demand for any particular food is perfectly inelastic.
The application of the formula for measuring Price Elasticity of Demand results in Zero

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Point Elasticity of Demand

This is measuring the elasticity at a given point on a curve, rather than between two points as we do when we use Arc Elasticity of Demand

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Positive

The plus sign is positive.  The sign for Giffen Goods under Price Elasticity of Demand will always be positive.  The sign for Normal Goods under Income Elasticity of Demand will always be positive.. The sign for Substitute Goods under Cross Elasticity of Demand   will always be positive

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Price Elasticity of Demand

Price Elasticity of Demand measures the responsiveness (or elasticity) of a good in respect of a change in the price of that good.  The greater the elasticity, the more responsive the good is to a change in price.  Unitary Elasticity happens when there is a one to one relationship between price and quantity demanded.  The application of the Arc Elasticity formula is designed to show how far elasticity has moved from that one to one relationship - greater than 1 means an elastic response, while less than one means an inelastic response (all numbers are treated in their absolute values)

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Profit

The difference between revenue (money taken in) and expenditure (money spent).  Profit is, in Economic terms, the return to the Entrepreneur for taking the uninsurable risks of running a business.  It is different from rewards to the other factors of production because it is residual (what is left when all the other factors have been paid) and may be negative (not all enterprises succeed)

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R

Rectangular Hyperbola

This is the slope of the Demand Curve when unity is achieved. It shows that for every 1% increase in price there will be a corresponding 1% decrease in demand - resulting in the same amount of revenue being earned.  The rectangular area from any given point on the  hyperbola to the two axes is equal to the rectangular area from any other given point on the hyperbola.  This shows that, regardless of price, the revenue will be the same when a good has unitary elasticity

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S

Shift

A demand curve, or a supply curve,  is a graphical representation of the ratio between the X and Y axes. They show the relationship between Price and Quantity.  To measure what quantity will be demanded/supplied at any given price one just traces that price from the Y axis and from there down to the X axis.  This is called measuring along the curve.
If anything other than Price causes a change in Quantity, this is represented by shifting the curve to the right or to the left.
A demand curve will shift to the right (upward from the Origin)if more of the good is now being demanded at any given price and vice versa.
A supply curve will shift to the right if costs of production have been reduced - to the left if costs of production have been increased

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Substitute

Substitute goods are also known as competitive goods, i.e., goods that may be readily substituted one for the other.  These are similar goods which are on a supermarket shelf competing for a place in your shopping trolley

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T

Time-lag

If the price of something increases, the consumer is sovereign insofar as s/he can take an immediate decision to buy or not to buy.  Not so with the supplier.  If the price of a good goes up, the supplier cannot always immediately increase the supply of the goods.  There is quite often a time-lag.  Regardless of what happens to the price of strawberries in June, the supplier cannot alter the quantity being supplied to the market - the decision on the quantity was taken some months previously

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Total Revenue

Total Revenue is the total amount of money received by a supplier of goods.  It is the price of the Goods (Average Revenue) multiplied by the quantity of goods which has been sold.  Always remember that Total Revenue is not Total Profit.
In Price Elasticity of Demand, if the demand for a  good is inelastic, then a price increase will bring about an increase in total revenue;  if it is elastic a price increase will result in a decrease in total revenue;  if it is unitary a change in price will not bring about a change in total revenue

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U

Unit / Unitary

Unitary or Unit Elasticity occurs when the working out of the Arc Elasticity Formula results in an answer which is equal to 1 in absolute terms.  If it is a minus one (as it will be for normal goods under Price Elasticity of Demand) there will be no change in total revenue as a result of a price change because a 1% change in price will lead to a 1% change in quantity demanded - in the opposite direction.
Be careful, though, that a plus one as an answer in Price Elasticity of Demand, indicates that the goods are Giffen goods and would result in an increase in revenue as price increases

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Y

YED

YED is an abbreviation for Income Elasticity of Demand.  The Y stands for "Yield" which is the same as Income.  The Y is used because the capital I is reserved in Economics for Investment.
It measures the proportionate change in quantity demanded caused by a change in income of the population.  The formula used to calculate it is the same as the formula used to calculate Price Elasticity of Demand - however, the sign will always be positive for Normal Goods

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