1.2.3 Price, Income And Cross Elasticities Of Demand ✅

Question 1

What is the law of demand?

Answer 1

When there is an increase in price quantity demanded will fall.

Question 2

What is PED?

Answer 2

Price elasticity of demand reveals how responsive is demand to a change in price.

Question 3

Give the PED calculation

Answer 3

P1/QD1 X change in QD/change in p

Question 4

What do economists ignore when working out the PED?

Answer 4

The negative sign (will always be negative).

Question 5

What are the five PED values? And what are their PEDS?

Answer 5

Perfectly inelastic = 0 (more theoretical)
Relatively inelastic = 0 to 1
Unitary elastic = 1
Relatively elastic = 0 to infinity
Perfectly elastic = infinity (more theoretical)

Question 6

What is the difference between an elastic and inelastic graph?

Answer 6

Elastic are more flat and inelastic and more vertical.

Question 7

What are the characteristics of a product which is elastic to demand?

Answer 7

• luxury good (takes up big chunk of disposable income).
• competitive market (more substitutes).
• frequently bought (more likely to compare prices).

Question 8

What are the characteristic of an inelastic good?

Answer 8

• short-term (demand usually more inelastic here eg like fuel).
• necessity.
• addictive (more accommodating to higher prices).
• few substitutes.
• product is a small percentage of income (rich and money doesn’t matter).
• brand loyalty.

Question 9

What is a positive of an inelastic good to the producers?

Answer 9

Bigger revenue. (Prices can be increased).

Question 10

What is YED?

Answer 10

Income elasticity of demand is the responsiveness of demand to a change in income.

Question 11

How do you calculate YED?

Answer 11

Y1/QD1 X change in QD/change in income

Question 12

What determines the type of product a good is when YED is measured?

Answer 12

The symbol.

Question 13

What does a negative YED mean?

Answer 13

It is an inferior good. (Income increases demand decreases - look for better options).

Question 14

What does it mean when YED is positive? Give two types?

Answer 14

It is a normal good (demand increases when income increases).
Normal necessity good = 0 to 1
Normal luxury good = 1+

Question 15

What type of good is income inelastic?

Answer 15

Normal good (income in elastic).

Question 16

What good is considered income elastic?

Answer 16

• normal luxury (highly price elastic).

Question 17

What is YED influence by?

Answer 17

Any changes in the economy that influence wages/income.

Question 18

Factors that influence YED?

Answer 18

• a recession that causes wages to fall. (Demand for inferior increases)
• period of economic growth, increase in wages.
• Minimum wage legislation.
• taxation.
• increase in international trade.

Question 19

What is XED?

Answer 19

Cross price elasticity of demand which is the responsiveness for changes in quantity demanded for X from the change in price of Y.

Question 20

What is XED talking about?

Answer 20

How changes in prices of compliments and substitutes effect the demand of a related product.

Question 21

How do you calculate XED?

Answer 21

Original price/ original QD X change in QD/ change in price.

Question 22

What does a negative sign on the XED show? What does the higher value show?

Answer 22

That the products are compliments. Shows they are strong compliments.

Question 23

What will the XED be if the goods are complimentary?

Answer 23

Bellow 0.

Question 24

What does the positive sign on the XED show? What does a higher XED show?

Answer 24

That they are substitutes. It shows that they have a strong relationship (strong substitutes).

Question 25

What does it mean when the XED is 0? Or if it is closer to 0?

Answer 25

That the goods are unrelated. When XED is closer to 0 it means the relationship between the goods is weaker.

Question 26

What is the revenue rule of PED trying to achieve?

Answer 26

Maximising profits.

Question 27

What is the revenue rule of PED?

Answer 27

• that a firms should increase price for inelastic in demand products and decrease the price for elastic in demand products.

Question 28

Why is knowledge on PEDs important to gov? (Consider inelastic and elastic).

Answer 28

Gov- can raise tax to inelastic demand products without harming firms as they can shift price onto consumers.
Also subsidising right products (elastic to demand) as they will get a greater proportional increase in demand.

Question 29

Why is knowledge on XED important to firms?

Answer 29

As they seek to maximise profits.
So use knowledge to consider:
- adjusting price as a strategy.
- help predict the likely impact of competitors price changes on their sales.

Question 30

Why is knowledge on YED important to firms?

Answer 30

Useful when maintaining maximin profit during periods of recession.
Eg.
- firms consider providing more inferior goods during a recession.
- producing more normal goods specifically normal luxury during periods of economic growth.