3.2 Price, Income And Cross Elasticites Of Demand Flashcards
What is elasticity?
The proportionate responsiveness of a second variable to an initial change in the first variable
Price elasticity demand equation?(PED)
%change in quantity demanded/%change in price
Income elasticity of demand equation(YED)
%change in quantity demanded/% change in income
Cross-elasticity demand equation (XED)?
%change in quantity of A demanded/% change in price of B
What is unit elasticity?
When a good has a PED of 1
Percentage change in price=percentage change in quantity demanded
What is elastic demand?
When the PED>1 means it is responsive to a change in price
What is inelastic demand?
PED<1 means the good is not responsive to a change in price
PED def?
Measures the extend to which the demand for a good changes in response to a change in price of that good
What is a horizontal demand curve mean?
It is perfectly elastic
What does a vertical demand curve mean?
It is perfectly inelastic
What 5 factors determine the price elasticity of demand?
-sustainability
-percentage of income
-necessities or luxuries
-“width” of the market definition
-time
How does sustainability determine the PED?
MOST IMPORTNAT FACTOR
-when there is a substitute consumers respond to a change of price by buying the substitute
How does %of income determine the PED?
Demand curve for goods and services when households spend a large % of income is more elastic than small items that account for a fraction of income
How does necessities and luxuries determine the PED?
-demand for necessities is price inelastic
-demand for luxuries is elastic
How does the width or market definition affect the PED?
-wider the definition of the market under consideration, the lower the PED
E.g PED more elastic demand for break produced in one bakery> demand for bread produced by all bakeries PED elastic demand
How does time affect the PED?
-demand is more elastic in the long run than the short run because it takes more time to respond to price
How can you find out the elasticity of two points on the demand curve?
-total consumer expenditure increases in response to price fall -elastic
-total consumer expenditure does not increase in response to price fall-inelastic
-total consumer expenditure constant to response in price fall-unity
What is the income elasticity of demand?
Measures how demand of a good changes with a change to income
When disposable income increases, the demand curve shifts..
Right (if the good is a normal good)
For YED what is it for a normal and inferior good?
Normal good: positive
Inferior good: negative
What can normal goods be split into and what is their YED
-superior goods or luxuries (YED>1)
-necessities(0<YED<1)
What is Cross elasticity of demand?
Measures how demand for one good changes in response to a change in price of another
What are the three possible demand relationships that the XED shows?
-complementary goods(joint demand
-substitutes(competing demand)
-absence of any discernible relationship
If goods are substitutes the XED is ?
Positive (elastic)
If goods are complementary the XED is?
Negative(inelastic)
If you select goods with no demand relationship what will the XED be?
0 due to the lack of a relationship
PED of perfectly inelastic?
0
diagram of elastic demand?
(elasticty decreases as you move down the curve)
diagram: inelastic demand
(elasticty rises as you go up the curve)
as you move dowm the demadn curve it get more…
inelastic
