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Economics-micro > 1.2.3 Price, Income and Cross elasticities > Flashcards

1.2.3 Price, Income and Cross elasticities Flashcards

1
Q

What is PED?

A

the measure of responsiveness of quantity demanded to the change in price of a good or service

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2
Q

Whats the equation for PED

A

% change of demand / % change of price

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3
Q

What is elastic demand

A

> 1
responsive to a change in price

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4
Q

What is inelastic demand

A

<1
not very responsive to change in price

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5
Q

What is unitary demand

A

1
% change in demand is equal to % change in price

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6
Q

What is perfectly elastic demand

A

Infinity
nothing will be demanded at a higher price

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7
Q

What is perfectly inelastic demand

A

0
whatever price same quantity is demanded

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8
Q

What are the factors affecting elasticity

A

Substitutes
Time
Addictiveness
Price relative to income

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9
Q

Whats the equation for percentage change

A

new-old/old x 100

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10
Q

Why is PED important?

A

-Setting prices
if elastic a price rise= revenue falls
or price fall= revenue rise
if inelastic a price rise= revenue rise
or price fall= revenue fall
-Setting indirect taxes
-Setting subsidies

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11
Q

What is YED

A

Income elasticity of demand
Responsiveness of demand to a change in income

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12
Q

Whats the equation for YED

A

% change demanded / % change income

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13
Q

What is a normal good

A

positive YED
a fall in income will cause a fall in demand
rise in income causes rise in demand
luxury 1 to infinity
necessity 0 to 1

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14
Q

What is an inferior good

A

negative YED
fall in income causes a rise in demand
rise in income causes fall in demand
have higher quality substitutes

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15
Q

What is XED

A

Cross elasticity of demand
responsiveness of demand for one good as a result of price change of another good

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16
Q

Whats the equation for XED

A

% change demanded for good X /
& change price for good Y

17
Q

What are complements

A

negative XED
rise in price leads to fall in demand for complement
can creates bundles or take overs

18
Q

What are substitutes

A

positive XED
rise in price leads to rise in demand for substitute
causes advertising and price wars

19
Q

What are independent goods

A

XED = 0
no relationship between goods change in price had no impact on other good

20
Q

What is the importance of XED

A

tells a firm how demand will change following a price change by rivals or partners

Economics-micro (15 decks)

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