1.2.3 Price, Income and Cross Elasticities of Demand Flashcards
Elasticity
A measure of the sensitivity of one variable to changes in a other variable.
Price elasticity of demand
A measure of sensitivity of quantity demanded to changes in price.
Income elasticity of demand
A measure of the sensitivity of quantity demanded to changes in income.
Cross elasticity of demand
A measure of the sensitivity of the quantity demanded of one good to changes in the price of another good.
PED=
%change Qd/ %change p
OR
P/Q x change Q/ change P
Perfectly elastic
As demand increases, price remains constant.
D= infinity
Relatively elastic
A change in price will bring about a proportionately larger change in Qd.
D= 1 to infinity
Unitary
A change in price will bring about the exact and opposite change in Qd.
D=1
Relatively inelastic
A change in price will bring about a proportionately smaller change in Qd.
D= 0 to 1
Perfectly inelastic
As price increases demand remains constant.
D= 0
Total revenue
The income received for selling a good or service.
Price inelastic demand
A change in price will bring about a smaller proportionate change in quantity demanded.
Price elastic demand
A change in price will bring about a larger pro participate change in quantity demanded.
Inferior goods
When income rises, quantity demanded falls.
YED will be a negative value.
Normal good
When income rises, the quantity demanded rises.
YED will be positive.
Substitute goods
As the price of one good increases the quantity demanded of another good also increases.
Complementary goods
As the price of one good falls the quantity demanded of the complement increases.
