1.2.3 Price, Income and Cross elasticities Flashcards
What is PED?
the measure of responsiveness of quantity demanded to the change in price of a good or service
Whats the equation for PED
% change of demand / % change of price
What is elastic demand
> 1
responsive to a change in price
What is inelastic demand
<1
not very responsive to change in price
What is unitary demand
1
% change in demand is equal to % change in price
What is perfectly elastic demand
Infinity
nothing will be demanded at a higher price
What is perfectly inelastic demand
0
whatever price same quantity is demanded
What are the factors affecting elasticity
Substitutes
Time
Addictiveness
Price relative to income
Whats the equation for percentage change
new-old/old x 100
Why is PED important?
-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
What is YED
Income elasticity of demand
Responsiveness of demand to a change in income
Whats the equation for YED
% change demanded / % change income
What is a normal good
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
What is an inferior good
negative YED
fall in income causes a rise in demand
rise in income causes fall in demand
have higher quality substitutes
What is XED
Cross elasticity of demand
responsiveness of demand for one good as a result of price change of another good
Whats the equation for XED
% change demanded for good X /
& change price for good Y
What are complements
negative XED
rise in price leads to fall in demand for complement
can creates bundles or take overs
What are substitutes
positive XED
rise in price leads to rise in demand for substitute
causes advertising and price wars
What are independent goods
XED = 0
no relationship between goods change in price had no impact on other good
What is the importance of XED
tells a firm how demand will change following a price change by rivals or partners
