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
