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Economics > 1.2 > Flashcards

1.2 Flashcards

1
Q

What is price elasticity of demand (PED) a measure of?

A

PED is a measure of the responsiveness of quantity demanded to the change in the price of a good or service.

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2
Q

What is the formula for price elasticity of demand (PED)?

A

% change in quantity demanded ➗ % change in price

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3
Q

What does it mean if PED is 0?

A

Demand is perfectly inelastic.

Quantity demanded doesn’t change at all when the price changes.

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4
Q

What does it mean if PED is between 0 and -1?

A

Demand is price inelastic.

Quantity demanded isn’t very responsive to price changes.

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5
Q

What does it mean if PED is -1?

A

Demand is unit price elastic/ unitary elastic.

The % change in quantity demanded is the same as the % change in price.

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6
Q

What does it mean if PED is -infinity?

A

Demand is perfectly elastic

Quantity demanded will fall to 0 if the price rises.

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7
Q

What does income elasticity of demand (YED) measure?

A

YED measures the responsiveness of demand following a change in real income.

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8
Q

What is the formula for income elasticity of demand (YED)?

A

The formula is: % change in demand ➗ % change in income

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9
Q

Do normal goods have a positive or a negative YED?

A

Normal goods have a positive YED.

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10
Q

What is the YED for normal necessities?

A

Normal necessities have a YED of between 0 and 1. Demand rises less than proportionately to income- demand is income inelastic

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11
Q

What is the YED for luxury goods and services?

A

Luxury goods and services have a YED of more than 1. Demand rises more than proportionately to a change income- demand is income elastic

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12
Q

Do inferior goods have a positive or a negative YED?

A

Inferior goods have a negative income elasticity of demand.

As consumers’ incomes fall, demand rises

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13
Q

What does cross elasticity of demand (XED) measure?

A

It measures the responsiveness of demand for good X following a change in the price of good Y (a related good)

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14
Q

What is the formula for cross elasticity of demand (XED)?

A

The formula is: % change in quantity demanded of good X ➗ % change in price of good Y

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15
Q

Do substitutes have a positive or a negative XED?

A

Substitutes have a positive XED

An increase in the price of one product will lead to a rise in demand for the other, as consumers swap away from the more expensive good

A high value suggests they are close substitutes

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16
Q

Do substitutes have a positive or a negative XED?

A

Substitutes have a positive XED

An increase in the price of one product will lead to a rise in demand for the other, as consumers swap away from the more expensive good

A high value suggests they are close substitutes

Economics (3 decks)

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