2.2 Price, income and cross elasticity of demand

Question 1

Define the term “Price elasticity of demand” (PED)

Answer 1

PED measures the responsiveness of quantity demanded given a change in price.

Question 2

How can we calculate the PED?

Answer 2

%△QD
__________
%△P

Question 3

How can we calculate the percentage difference?

Answer 3

Difference
_________________ x100
Original

Question 4

If the PED turns out to be > 1 then the demand is?

Answer 4

price elastic.

Question 5

If the PED turns out to be < 1 then the demand is?

Answer 5

price inelastic.

Question 6

If the PED turns out to be 0 then the demand is?

Answer 6

perfectly price inelastic.

Question 7

If the PED turns out to be ∞ then the demand is?

Answer 7

Perfectly price elastic.

Question 8

If the PED turns out to be 1 then the demand is?

Answer 8

Unit price elastic.

Question 9

When is the demand for a good or service price elastic/inelastic?

Answer 9

When :
(S)ubstitute : The more substitutes the more price elastic & vice versa.
(P)ercentage income : The greater the more price elastic & vice versa.
(L)uxury/Necessity
(A)ddictive/Habit forming
(T)ime period : In the short run the demand is price inelastic because there are few substitutes available or the consumers don’t have much time to look for alternatives. Whereas in the long run the demand is much more price elastic as more substitutes become available.

Question 10

Define the term “Income elasticity of demand” (YED)

Answer 10

YED measures the responsiveness of quantity demanded given a change in income.

Question 11

How can we calculate the YED?

Answer 11

%△QD
__________
%△Y

Question 12

Define the term “Normal goods”

Answer 12

Normal goods have a positive relationship between income and demand. So, as the income goes up the demand will go up, and as the income goes down the demand will go down.

Question 13

Define the term “Inferior goods”

Answer 13

Inferior goods have an inverse relationship between income and demand. So, as the income goes up demand goes down and as the income goes down demand will go up.

Question 14

True or False :
For a Normal Good the YED must be negative.

Answer 14

False, for a normal good the YED must be a positive number.

Question 15

True or False :
For a Inferior Good the YED must be negative.

Answer 15

True.

Question 16

For normal goods, the demand is income elastic when the result is ? (Normal Luxury)

Answer 16

> 1

Question 17

For normal goods, the demand is income inelastic when the result is ? (Normal Necessity)

Answer 17

< 1

Question 18

For inferior goods, the demand is income elastic when the result is?

Answer 18

> 1

Question 19

For inferior goods, the demand is income inelastic when the result is?

Answer 19

< 1

Question 20

When the demand is 0 the income is ?

Answer 20

Perfectly income inelastic.

Question 21

Define the term “Cross elasticity of demand” (XED)

Answer 21

Measures the responsiveness of quantity demanded of a good/service given a change in the price of another.

Question 22

How can we calculate the XED?

Answer 22

%△QDa
____________
%△Pb

Question 23

If XED = a positive number then its a _______________ good?

Answer 23

Substitute.

Question 24

If XED = a negative number then its a ____________ good?

Answer 24

Complement.

Question 25

If the XED > 1 then the demand between the goods is price ___________?

Answer 25

Elastic.

Question 26

If the XED < 1 then the demand between the goods is price ____________?

Answer 26

Inelastic.

Question 27

If the XED = 0 then the demand between the goods is ____________?

Answer 27

Perfectly price inelastic.