3.1.2.2 price income cross elasticity of demand Flashcards
what is price elasticity of demand
how the quantity demanded responds to a change in its price
what is the formula for PED
%change in QD/ %change in price
price elastic
when a change in product price has a large affect on demand
price inelastic
when a change in price has a proportionally smaller affect on demand
is a price inelastic graph steep or flat? why?
steep, because as rise in price will have a small affect on QD
PED>1
price elastic
PED<1
price inelastic
income elasticity
the affect on demand when incomes changes
what is the formula for YED (income)
%change in QD/ %change in real income
inferior good
a good which experiences a decrease in demand when income rises, and vise versa
normal good
a good which experiences an increase in demand when income rises
what does a perfectly elastic graph look like
a straight horizontal line
what does a pefectly inelastic graph look like
a straight vertical line
0<YED<1 (positive YED)
normal good
YED>1
luxury good
YED<0 (negative YED)
inferior good
cross elasticity
the affect a change in the price on one good has on the demand of another good
what is the formula for XED (cross)
XED=%change in QD of good x/ %change in price of good y
substitute
a similar rival product which can be purchased instead, often the cheaper option
complements
a good which is used with another good
what happens to a product if a substitute increases in price
demand for your product will increase
XED>0
substitute good
XED=0
two goods are independent and have no effect on the other
XED<0
complement good
true of false, the closer the substitutes the higher the XED
true
what factors affect PED
-availability of substitutes
-degree of necessity
-% of income spent on the good
-brand loyalty
what is the relationship between PED and total revenue
-if a product is price elastic then its price has a negative relationship with revenue
-if a product is price inelastic then its price has a positive relationship with revenue
if a price elastic product increases its price what will happen to revenue
it will decrease, because the price change will have a large effect on demand
if a price inelastic product increases in price what will happen to revenue
it will increase
how can a firm use knowledge of of price elasticity of demand to maximize revenue
if a firm has a product with PED<1 (inelastic) then an increase in price would have a small effect on demand, meaning the price increase would lead to a greater total revenue.
