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
What will happen to substitutes if the price of one good increases?
increase in demand for the rival product
What is the value XED for two substitutes?
always positive
What are complements?
product in joint demand
What happens if a fall in price of one complementary product happens?
increase in demand for complementary product
what is the value of XED for two complements?
always negative
The stronger the relationship of two XED products the …
higher the co-efficent of cross price elasticity of demand
Describe the relationship of closs substitutes?
strong postive cross elasticity of demand
Explain complement relationship?
cross elasticity will be highly negative
Explaun relationship of unrelated products?
0 cross elasticity
