1.2.3: Price, Income & Cross Elasticities Of Demand Flashcards
What are price elasticities of demand (PED)?
The responsiveness of demand to a change in price of a good.
PED greater than 1 =
Elastic.
PED = 1 =
Unitary elastic.
PED less than 1 =
Inelastic.
What is elastic (PED)?
•Where quantity demanded changes by a larger % than price.
•Demand is relatively responsive to price.
(PED > 1).
What is unitary elastic (PED)?
•Where quantity demanded changes by the same % as price.
PED = 1.
What is inelastic (PED)?
•Where quantity demanded changes by a smaller % than price.
•Demand is relatively unresponsive to price.
(PED < 1).
What is an example of an inelastic graph?
What is an example of an elastic graph?
What are the factors that influence price elasticities of demand (PED)?
Substitutes available
Proportion of income
Luxury/neccesities
Addictiveness/habitual
Time frame
Brand loyalty
SPLAT B
What is the significance of price elasticities of demand (PED)?
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.
What are income elasticities of demand (YED)?
The responsiveness of demand to a change in income.
YED less than 0 =
Inferior good.
YED greater than 0 =
Normal good.
YED greater than 1 =
Luxury good.
What are inferior goods (YED)?
•A rise in income leads to a fall in demand for the good.
(YED < 0).
What are normal goods (YED)?
•A rise in income leads to an increase in demand for the good (necessities).
(YED > 0).
What are luxury goods (YED)?
•A type of normal good.
(YED > 1).
What is the significance of income elasticities of demand (YED)?
-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.
What are cross elasticities of demand (XED)?
The responsiveness of demand of a product (x) to the change in price of another product (y).
XED greater than 0 =
Substitutes.
XED less than 0 =
Complementary goods.
XED = 0 =
No correlation/unrelated goods.
What are substitutes (XED)?
•An increase in price of good y will increase demand for good X.
(XED > 0).
What are complementary goods (XED)?
•An increase in price of good y will decrease demand for good x.
(XED < 0).
What are unrelated goods (XED)?
•No correlation.
(XED = 0).
