1.2.3 Price, income and cross elasticities of demand

Question 1

Complements

Answer 1

2 goods which are in joint demand

Question 2

Cross elasticity of demand

Answer 2

XED= %change in QD of good x
%change in price of good y

XED measures the responsiveness of demand for good X following a change in the price of good Y

+XED= substitutes
-XED= complements
0=XED= unrelated

Question 3

Derived demand

Answer 3

derived demand is something that comes from (is derived) from the demand for something else.

e.g. the demand for machinery is derived from the demand for consumer goods that the machinery can make

Question 4

Elastic demand

Answer 4

The demand for a good will be responsive to a change in price.

PED is greater than 1

Question 5

Income elasticity of demand

Answer 5

YED=%change of QD
%change of Y

YED measures the relationship between a change in demand following a change in the real income of consumers

Question 6

Inelastic demand

Answer 6

The demand for a good won’t be responsive to a change in price

PED will be less than 1

Question 7

Inferior good

Answer 7

when demand for a product falls as a real income increases

YED will be negative

E.G. pot noodle, shop name goods

Question 8

Luxury goods

Answer 8

A good for which demand increases more than what is proportional as income rises.

Considered a type of normal good

They have a YED of more than 1, Demand is income inelastic

E.G. iPhone

Question 9

Necessity goods

Answer 9

good that consumers will buy regardless of a change in their income.

Considered a type of normal good

Has a YED between 0 and 1
Demand is income inelastic

E.G.milk, cereal, toothpaste, and bread

Question 10

Price elasticity of demand

Answer 10

PED= %change in QD
%change in price

PED measures responsiveness of quantity demanded for a good after a change in the goods own price

•PED=0 demand is perfectly inelastic
•PED=0-1 demand is price inelastic
•PED=-1 demand is unit price elastic
•PED= lower than -1 demand is price elastic
•PED= infinity demand is perfectly elastic

Question 11

Unit elasticity of demand

Answer 11

if the change in QD is the same as price change then the product is unit price elastic

PED=1 considered price elastic

Question 12

Real income

Answer 12

The money and from employment after the effects of inflation (taxes, debts, etc.)

Question 13

Substitutes

Answer 13

Goods in competitive demand that can be used in place of each other

Question 14

Total revenue

Answer 14

TR= P x Q

The amount of money and buy a firm from selling its output

Question 15

Unrelated goods

Answer 15

good but have no relationship between them.

XED=0