2.3 Price, Income and Cross Elasticities of Demand

Question 1

What is PED?

Answer 1

Measures responsiveness of quantity demanded to a change in price

Question 2

PED formula?

Answer 2

% change in Qd / % change in P

Question 3

Factors affecting PED?

Answer 3

SPLAT

Question 4

PED along the demand curve?

Answer 4

More inelastic along the curve

Question 5

Limitations to PED?

Answer 5

• Inaccuracies
• Elasticity varies over time
• Change in market strategies

Question 6

What is YED?

Answer 6

Measures responsiveness of quantity demanded to a change in real incomes

Question 7

YED formula?

Answer 7

% change in Qd / % chnage in Y

Question 8

What are normal goods?

Answer 8

Positive YED - demand increases as incomes increase

Question 9

What are inferior goods?

Answer 9

Negative YED - demand decreases as incomes increase

Question 10

What is XED?

Answer 10

Measures responsiveness of quantity demanded of Good A in response to a change in price of Good B

Question 11

XED formula?

Answer 11

% change in Qd of A / % change in P of B

Question 12

Substitutes?

Answer 12

Positive XED - A demand increases as B price increases
- Strong if elastic

Question 13

Complements?

Answer 13

Negative XED - A demand decreases as B price increases
- Strong if elastic

Question 14

Unrelated?

Answer 14

XED value of 0

Question 15

Relevance of XED?

Answer 15

1) Use of ‘bundles’
2) ‘razor and blades’ model
3) Brand proliferation (companies own different competing brands)