1.2.3 Price, Income, and Cross Elasticies

Question 1

What is Price elasticities of demand

Answer 1

Measures responsiveness of quantity demanded after a change in the good’s own price

Question 2

What is the basic formual for the co-efficent of Price elasticities of demand

Answer 2

Question 3

If PED = 0

Demand is what

Answer 3

Pefectly inelastic

Quantity demanded does not change at all when price changed

Demand curve will be vertical

Question 4

If PED is less than 1

Demand is what

Answer 4

% change in qty demanded smaller than % change in price

demand is price inelastic

Question 5

If PED = 1

Demand is what

Answer 5

% change qty demanded, exactly same as % change in price

Demand is unit price elastic

Question 6

If PED is greater than 1

Demand is what

Answer 6

demand responds more than porportiantely to price

demand is price elastic

Question 7

If PED = infinty

Demand is

Answer 7

perfecty elastic

quantity demanded will fall to 0 if price rises

Question 8

7 Factors affecting price elasticity of demand

Answer 8

• Number of close subsititues
• Cost of switching between prouducts
• Degree of necessity, if good is luxury or not
• Proportion of consumer’s income allocated to good
• Time period allowed following a price change
• Weather product subject to habitual consumption
• Method of payment

Question 9

What is the formual to worl out total revenue

Answer 9

Price x quantity bought

Question 10

How does price inelasticity link to revenue

Answer 10

rise is price leads to a rise in total revenue

Question 11

How does price elasticity link to revenue

Answer 11

a fall in price would lead to a rise in total revenue

Question 12

How does perfectly inelastic, link to revenue

Answer 12

a price change will lead to a proportional revenue change

Question 13

6 Usefulness of Price Elasticity of Demand for Producers

Answer 13

Firms can use PED estimates to predict

• Effect of a change in price of total revenue of sellers
• Price volatility in a market following changes in suppy
• Effect of a change in an indirect tax on price and quantity demanded and if a business can pass tax on to the customer
• Information on PED used for price discrimination (different prices for same product)
• Where to charge a higher price and how to increase demand

Question 14

What is income elasticities of Demand (YED)

Answer 14

Measure of the responsiveness of demand following a change in real income

Question 15

What is the formula used for calculating income elasticity of demand

Answer 15

% change in demand / % change in income

Question 16

Do Normal goods have a positive or negative YED

Answer 16

Positive

So as consumers’ incomes rises, more is demanded at each price

Outward shift in the demand curve

Question 17

Normal mecessities have a YED between

Answer 17

0 and +1

Question 18

Luxury goods/services have a YED of

Answer 18

Bigger than +1

Demand s income elastic

Question 19

Do inferior goods have a positive or negative YED

Answer 19

Negative

Question 20

Examples of inferior goods

Answer 20

• Own label discounters
• Urban bus transport
• Cigarettes
• Economy class travel

Question 21

How can YED vary within a product range like food

Answer 21

YED for an own label foods is less than high-value ‘finest’ food ranges

Question 22

How do business make use of estimated of YED

Explain temrs of luxury and necessity goods

Answer 22

Helps firms predict the effect of an econmic cycle on sale

Luxury goods with high YED will see greater sales volatility over a necessity good that are income-inelastic

Question 23

As we become better off, we can afford to ……. spending on …………..

YED will also affect the pattern of …… over time

Answer 23

increase

different goods/service

demand

Question 24

Over time, normal luxury goods, what happens to YED

And why

Answer 24

exceeds +1

proporition of a consumers income spent on that product will go up

Question 25

Over time, what happens to the YED of inferior goods and why

Answer 25

As income rises, the share or proportion of their budget on these products will fall

This is becuase as income rises, demand declines and so too the share of income spend on these products

Question 26

Over time, what will happen to the YED of normal necessities

Answer 26

as income rises, the share or proportion of their budget on these products will fall

Question 27

What is cross elasticity demand (XED)

Answer 27

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

Question 28

What is substitute good

Answer 28

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

A high value suggests both products are close substitute

Question 29

Does a substitute product have a positive or negative XED

Answer 29

positive

Question 30

What is a compliment good, in terms of good T

Answer 30

An increase in the price of Good T will lead to a contraction in demand for T and a fall in demand for a complement, good S

Question 31

Is the XED of compilment goods positive or negative

Answer 31

Negative

Question 32

What type of product would have a cross-price elasticity of 0 (XED)

Answer 32

Unrelated good

Question 33

What is the relavance of XED and complement goods

Answer 33

Businesses may want to consider supplying complimentary goods in a bundle or close together in shops

They may also put a high mark up on one of the goods, which is sold with the other good, like printer and ink cartages

Question 34

What is the relavance of XED and substitute goods

Answer 34

diiferent brands owned by the same company, meaning they reduce competition and dominate more of the market