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.
