1.2.3 PED, YED, XED

Question 1

PED

Answer 1

-Responsiveness of quantity demand to a change in price

Unitary elastic PED=0:
-%change in demand = %change in price

Perfectly elastic PED=infinity:
-extremely responsive (in presence of competitors)

Perfectly inelastic PED=0
-Demand does not respond to price changes

Elastic PED>1
-Responsive to change in price

Inelastic PED<1
-Not very responsive to price changes

Question 2

YED

Answer 2

-Responsiveness of quantity demanded to a change in consumer income

Inferior good YED<0
-demand decreases as income increases
-own-brand

Normal goods 0<YED<1
-Demand increases with income but at a decreasing rate
-food/clothing/household appliances

Luxury goods YED>1
-Demand increases significantly with income
-designer clothes/luxury cars/holidays

Question 3

XED

Answer 3

-Responsiveness of quantity demanded to a change in price of another good

Substitutes XED>0
-e.g coke and pepsi

Complements XED<0
-tennis rackets and balls

Unrelated goods XED=0

-Weak if close to zero

Question 4

Factors affecting elasticty of demand

Answer 4

-Availability of substitutes
-Necessities vs luxuries
-Addictiveness
-Price as a proportion of income
-Durability - wait longer to replace

Question 5

The significance of elasticities of demand to firms and government

Answer 5

Firms
-Set prices and predict revenue chanegs
-Elastic demand means price increase will lead to decrease in total revenue
-If inelastic total revenue increases (percentage change in quantity demanded is smaller than percentage change in price)

Gov
-Make taxation and subsidy decisions
-Inelastic goods can bear higher taxes