2.2 Price, income and cross elasticities of demand Flashcards
What is elasticity theory?
Looks at the sensitivity of one variable in relation to another
What is the equation for price elasticity of demand?
% change in quantity demand / % change in price
What is the equation for income elasticity of demand?
% change in quantity demanded / % change in income
What is the equation for cross elasticity of demand?
% change in quantity demanded of good A / % change in price of good B
What does a PED coefficient of 0 mean?
Perfectly elastic
What does a PED coefficient of 0-1 mean?
Price inelastic
What does a PED coefficient of 1 mean?
Unitary elasticity
What does a PED coefficient of 1 to infinity mean?
Price elastic
What is a normal good?
As income rises, you consume more (and vice versa)
What is an inferior good?
As income rises, you consume less (and vice versa)
Products households tend to spend a higher percentage of their income on are more likely to be price (elastic/inelastic)?
Elastic
If a product has a positive YED what type of good does that mean it is?
Normal good
If a product has a negative YED what type of product does that mean it is?
Inferior good
If a product has a YED of between 0-1 does that mean it’s a necessity or luxury?
Necessity
If a product has a YED of between >1 does that mean it’s a necessity or luxury?
Luxury
What is a substitute good?
Price of good A increases, demand for good B goes up.
What is a complimentary good?
Price of good A increases, demand for good B decreases
If a product has a positive CED what type of good does that mean it is?
Substitute good
If a product has a negative CED what type of good does that mean it is?
Complimentary good
If a product has a CED of between -1 and 1 does that mean it’s a close or not close good. (Substitute or complementary)
Not close
(Positive - substitute)
(Negative - complimentary)
If a product has a CED of less than -1 or more than +1 does that mean it’s a close or not close good. (Substitute or complementary)
Close
(Positive - substitute)
(Negative - complimentary)
What is price elasticity of demand?
Responsiveness of demand based on change in price
What is income elasticity of demand?
Responsiveness in demand based on income changes
What is cross-elasticity of demand?
Responsiveness of demand based on the change in price of another good
What is a necessity good?
You have to buy regardless of income
What is a luxury good?
You tend to consume more as income rises
