1.3 Flashcards
what is the formula for income elasticity of demand?
YED
Y= income
what does YED measure?
income elasticity of demand
how much quantity demanded will respond to a chnage in income
what is the YED value for inferior goods?
- the YED will be negative
- as income decreases, demand increases
what is the YED value for normal goods?
- will be positive
- as when income increases demand also increases
what are income inelastic goods?
- normal goods
*0< YED<1 - QD will increase by a smaller percentage than I
- seen as necessities
what are income elastic goods?
- normal good
- YED between 1 and ∞
- QD will increases by a larger % than Y
- seen as a luxury
what are inferior goods?
as income increases, the demand for the good decreases
YED= -
what are normal goods?
as income increases, demand for the good increases
YED=+
what are income elastic goods?
QD is very responsive to chnages in income
* luxury goods
YED from 1 to ∞
what are income inelastic goods?
when QD is unresponsive to chnages in income
* necessitiy goods
YED between 0 and 1
what is cross elasticty of demand (XED)?
how is the demand for good A affected by chnages in price of good B
what is the formula for (XED) cross elasticity of demand?
what type of good has an XED of 0?
unrelated goods
what type of good has a negative XED?
- complementary goods
- as price of good A increases, demand for good B will decrease
what are complemenatry goods?
- goods bought and used together
- if price of good A increases then demand of good B decreases
XED= -
what type of good has a positive XED?
- substitute goods
- as the price goes up for price A, demand for price B goes up