2.2 Price Elasticity, Income Elasticity, and Cross Elasticity of Demand Flashcards
What’s the definition of PED?
A measure of the responsiveness to a change in price in the quantity demanded.
How do you calculate PED?
PED = %Change in QD / %Change in P
What does it mean if a good is price inelastic demand?
A large percentage change in price results in a proportionally smaller percentage change in quantity demanded.
What does it mean if a good is price elastic demand?
A small percentage change in price results in a proportionally larger percentage change in quantity demanded.
What are the 5 factors affecting PED?
Substitutes
Income
Luxuries
Time
Habit Farming
What is the definition of YED?
How a change in income can affect the quantity demanded for a given product/service in the market.
How do you calculate YED?
YED = %Change in QD / %Change in Y
What does it mean if the YED value is negative?
A rise in income will lead to a fall in quantity demand. Eg Inferior Good
What does it mean if the YED value is positive?
A rise in income will lead to a increase in quantity demand. Eg Normal Good
What is the definition of XED?
XED measures the responsiveness of quantity demanded of a good or service given a change in price of an other.
How do you calculate XED?
XED= %Change in QDa/%Change inPb
What does it mean if the XED value is Zero?
Zero Correlation between goods
What does it mean if the XED values are positive?
They are substitutes.
What does it mean if the XED values are negative?
They are Complements.
