2.5 Income and cross elasticity of demand Flashcards
define YED?
shows how responsive the demand for a product is to a change in (real) income
YED formula?
% change in QD / % change in income
What are the four types of goods?
normal , luxury, necessity, inferior
What types of goods come under normal goods?
- luxury goods, necessity goods
What YED do normal goods have?
positive income elasticity
What YED do luxury goods have?
YED > 1
What YED do necessity goods have?
0
What are normal necessities?
milk, fruits, bread
What are normal luxuries?
higher end products
When would a good be inferior?
if following an increase in income , less of the good is consumed then it is inferior
What happens to an inferior good when real incomes rise?
demand for inferior good will fall causing an inward shift of the demand curve
Inferior good examples?
- own labels at supermarkets
- bus
- cigarettes
- economy class travel
Define cross elasticity of demand?
measures responsiveness of demand for good x following a change in the price of a related good y
formula for XED?
% change in quantity demanded for good 1 / % change in price of good 2
WHat are substitutes ?
products in comeptitive demand
