Buyer’s Problem: Key Terms

Arc elasticity: A method of calculating elasticities that measures at the midpoint of the demand range.

Budget set: The set of all possible bundles of goods and services that can be purchased with a consumer’s income.

Consumer surplus: The difference between the willingness to pay and the price paid for the good.

Cross-price elasticity of demand: Measures the percentage change in quantity demanded of a good due to a percentage change in another good’s price.

Elastic demand: Goods have a price elasticity of demand greater than 1.

Elasticity: Measures the sensitivity of one variable to change in another.

Income elasticity of demand: Measures the percentage change in quantity demanded due to a percentage change in income.

Inferior good: For an inferior good, an increase in income causes the demand curve to shift to the left, or in other words, causes buyers to buy less of the good.

Inelastic demand: Goods that have inelastic demand have a price elasticity of demand less than 1.

Normal good: For a normal good, an increase in income causes the demand curve to shift to the right, or in other words, causes buyers to buy more of one good.

Perfectly elastic demand: A very small increase in price causes consumers to stop using goods that have perfectly elastic demand.

Perfectly inelastic demand: Quantity demanded is unaffected by prices of goods with perfectly inelastic demand.

Price elasticity of demand: Measures the percentage in quantity demanded of a good due to a percentage change in its price.

Unit Elastic Demand: Goods that have unit elastic demand have a price elasticity of demand equal to 1.