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? (S H I T L)
S ubstitutes (Availability)
H abit Forming
I ncome (Proportion Of)
T ime
L uxuries Vs Necessities
How is PED useful for businesses?
It helps businesses set prices and help predict sales when they change price
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?
Its an inferior good, A rise in income will lead to a fall in quantity demand
What does it mean if the YED value is positive?
Its a normal Good, A rise in income will lead to an increase in quantity demand
What does it mean if the value of YED is between 0-1
Its a necessity good
What does it mean if the value of YED is more than 1
Its a luxury good
How is YED useful for businesses?
It helps businesses predict changes in demand based on income changes.
What is the impact of a boom on luxury goods in terms of YED and why?
Demand for luxury goods typically increases because incomes rise
What is the impact of a recession on luxury goods in terms of YED and why?
Demand for luxury goods typically decreases because incomes fall
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.
How does XED help businesses?
Helps businesses understand the relationship between products.
What type of relationship do substitutes have in terms of XED?
Positive relationship
What type of relationship do complements have in terms of XED?
Negative relationship.
