1.2.3 Price, income and cross elasticities of demand

Question 1

Elastic vs Inelastic

Answer 1

Elastic - responsive to price changes
Inelastic - unresponsive to price changes

Question 2

What does PeD tell us?

Answer 2

the responsiveness of Qd to a change in price

Question 3

Price is elastic when:

Answer 3

• the good is not necessary
• there are lots of substitutes
• unbranded (homogenous)
• customer has long time span
• high proportion of spending

Question 4

Price is inelastic when:

Answer 4

• the good is necessary
• strong brand (differentiated)
• customer has short time span
• low proportion of overall spending
• Habit forming/ addictive

Question 5

Formulae for PeD

Answer 5

%ΔQd (Q2 - Q1) / Q1
———– OR ———————-
%ΔP (P2 - P1) / P1

Question 6

Formulae for YeD:

Answer 6

%Change in Quantity demanded
———————————————-
%Change in Income

Question 7

What does YeD tell us?

Answer 7

The responsiveness of quantity demanded to a change in Income.

Question 8

What does XeD tell us?

Answer 8

The responsiveness of the quantity demanded for one good to a change in the price on another related good

Question 9

Formulae for XeD:

Answer 9

%Change in Qd (Good A)
XeD = —————————————
%Change in Price (Good B)

Question 10

Which values for XeD relate to which type of relationship?

Answer 10

Any positive figure for XeD - substitutes
Any negative figure for XeD - complements
XeD = 0 - no relationship