1.2.3

Question 1

What is elasticity

Answer 1

How much something changes based on the change of another value. (Like price changing significantly because demand has increased a bit)

Question 2

How do you calculate price sensitivity

Answer 2

% change demand. Original price Change in demand
—————————. Or just use: ——————- x ————————-
% change price Original demand Change in price

Question 3

Income elasticity of demand (YED) can be calculated by doing:

Answer 3

% change of quantity demand
——————————————
% change of income

Question 4

What is cross price elasticity of demand? How can it be calculated?

Answer 4

% change of demand for x
———————————— responsiveness of changes in quantity demanded of good x to change
% change of demand for y in price of good y

Question 5

What is XED

Answer 5

Cross price elasticity of demand

Question 6

What are substitute goods

Answer 6

When two products are similar and can be easily replaced. In graphs their relationships will be represented with a line with a positive gradient. Depending on the strength of their relationship the gradient will be steep or almost flat.

Question 7

What are complimentary goods

Answer 7

Goods that don’t replace each other but work together. For example: tennis rackets and tennis balls. Even though these are two products they are closely related. A price change in one will likely change the demand for the other. On a graph the lime would have a negative gradient and be steep or almost flat depending on how close their relationship is.