1.2.3: Price, Income & Cross Elasticities Of Demand

Question 1

What is the shorthand of price elasticities of demand?

Answer 1

PED.

Question 2

What is the shorthand of income elasticities of demand?

Answer 2

YED.

Question 3

What is the shorthand of cross elasticities of demand?

Answer 3

XED.

Question 4

What are price elasticities of demand (PED)?

Answer 4

The responsiveness of demand to a change in price of a good.

Question 5

What is the formula of price elasticities of demand (PED)?

Answer 5

% change Q P1 change Q
—————- or — X ————-
% change P Q1 change P

Question 6

PED > 1 =

Answer 6

Elastic.

Question 7

PED = 1 =

Answer 7

Unitary elastic.

Question 8

PED < 1 =

Answer 8

Inelastic.

Question 9

What is elastic (PED)?

Answer 9

•Where quantity demanded changes by a larger % than price.
•Demand is relatively responsive to price.
(PED > 1).

Question 10

What is unitary elastic (PED)?

Answer 10

•Where quantity demanded changes by the same % as price.
PED = 1.

Question 11

What is inelastic (PED)?

Answer 11

•Where quantity demanded changes by a smaller % than price.
•Demand is relatively unresponsive to price.
(PED < 1).

Question 12

Elasticity ________ down a ________ line.

Answer 12

Decreases, linear.

Question 13

What is an example of an inelastic graph?

Answer 13

Question 14

What is an example of an elastic graph?

Answer 14

Question 15

What are the factors that influence price elasticities of demand (PED)?

Answer 15

•Availability of substitutes.
•Timeframe.
•Necessity.
•Addictiveness.
•% of expenditure.

Question 16

What is the significance of price elasticities of demand (PED)?

Answer 16

PED determines the effects of imposition of taxes:
-The more elastic the demand curve, the lower the tax on the consumer.
-The more inelastic the demand curve, the higher the tax revenue for the government.

Question 17

What are income elasticities of demand (YED)?

Answer 17

The responsiveness of demand to a change in income.

Question 18

What is the formulae of income elasticities of demand (YED)?

Answer 18

% change Q Y1 change Q
—————- or — X ————-
% change Y Q1 change Y

Question 19

YED < 0 =

Answer 19

Inferior good.

Question 20

YED > 0 =

Answer 20

Normal good.

Question 21

YED > 1 =

Answer 21

Luxury good.

Question 22

What are inferior goods (YED)?

Answer 22

•A rise in income leads to a fall in demand for the good.
(YED < 0).

Question 23

What are normal goods (YED)?

Answer 23

•A rise in income leads to an increase in demand for the good (necessities).
(YED > 0).

Question 24

What are luxury goods (YED)?

Answer 24

•A type of normal good.
(YED > 1).

Question 25

What is the significance of income elasticities of demand (YED)?

Answer 25

-It is important for businesses to know how their sales will be affected by changes in income of the population.
-It may impact the type of good a business produces.

Question 26

What are cross elasticities of demand (XED)?

Answer 26

The responsiveness of demand of a product (x) to the change in price of another product (y).

Question 27

What is the formulae of cross elasticities of demand (XED)?

Answer 27

% change Q (x) P1 (y) change Q (x)
——————— or ——— X ——————
% change P (y) Q1 (x) change P (y)

Question 28

XED > 0 =

Answer 28

Substitutes.

Question 29

XED < 0 =

Answer 29

Complementary goods.

Question 30

XED = 0 =

Answer 30

No correlation/unrelated goods.

Question 31

What are substitutes (XED)?

Answer 31

•An increase in price of good y will increase demand for good X.
(XED > 0).

Question 32

What are complementary goods (XED)?

Answer 32

•An increase in price of good y will decrease demand for good x.
(XED < 0).

Question 33

What are unrelated goods (XED)?

Answer 33

•No correlation.
(XED = 0).