3.2 Price, Income And Cross Elasticites Of Demand

Question 1

What is elasticity?

Answer 1

The proportionate responsiveness of a second variable to an initial change in the first variable

Question 2

Price elasticity demand equation?(PED)

Answer 2

%change in quantity demanded/%change in price

Question 3

Income elasticity of demand equation(YED)

Answer 3

%change in quantity demanded/% change in income

Question 4

Cross-elasticity demand equation (XED)?

Answer 4

%change in quantity of A demanded/% change in price of B

Question 5

What is unit elasticity?

Answer 5

When a good has a PED of 1

Percentage change in price=percentage change in quantity demanded

Question 6

What is elastic demand?

Answer 6

When the PED>1 means it is responsive to a change in price

Question 7

What is inelastic demand?

Answer 7

PED<1 means the good is not responsive to a change in price

Question 8

PED def?

Answer 8

Measures the extend to which the demand for a good changes in response to a change in price of that good

Question 9

What is a horizontal demand curve mean?

Answer 9

It is perfectly elastic

Question 10

What does a vertical demand curve mean?

Answer 10

It is perfectly inelastic

Question 11

What 5 factors determine the price elasticity of demand?

Answer 11

-sustainability
-percentage of income
-necessities or luxuries
-“width” of the market definition
-time

Question 12

How does sustainability determine the PED?

Answer 12

MOST IMPORTNAT FACTOR

-when there is a substitute consumers respond to a change of price by buying the substitute

Question 13

How does %of income determine the PED?

Answer 13

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

Question 14

How does necessities and luxuries determine the PED?

Answer 14

-demand for necessities is price inelastic

-demand for luxuries is elastic

Question 15

How does the width or market definition affect the PED?

Answer 15

-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

Question 16

How does time affect the PED?

Answer 16

-demand is more elastic in the long run than the short run because it takes more time to respond to price

Question 17

How can you find out the elasticity of two points on the demand curve?

Answer 17

-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

Question 18

What is the income elasticity of demand?

Answer 18

Measures how demand of a good changes with a change to income

Question 19

When disposable income increases, the demand curve shifts..

Answer 19

Right (if the good is a normal good)

Question 20

For YED what is it for a normal and inferior good?

Answer 20

Normal good: positive

Inferior good: negative

Question 21

What can normal goods be split into and what is their YED

Answer 21

-superior goods or luxuries (YED>1)
-necessities(0<YED<1)

Question 22

What is Cross elasticity of demand?

Answer 22

Measures how demand for one good changes in response to a change in price of another

Question 23

What are the three possible demand relationships that the XED shows?

Answer 23

-complementary goods(joint demand
-substitutes(competing demand)
-absence of any discernible relationship

Question 24

If goods are substitutes the XED is ?

Answer 24

Positive (elastic)

Question 25

If goods are complementary the XED is?

Answer 25

Negative(inelastic)

Question 26

If you select goods with no demand relationship what will the XED be?

Answer 26

0 due to the lack of a relationship

Question 27

PED of perfectly inelastic?

Answer 27

0

Question 28

diagram of elastic demand?

Answer 28

(elasticty decreases as you move down the curve)

Question 29

diagram: inelastic demand

Answer 29

(elasticty rises as you go up the curve)

Question 30

as you move dowm the demadn curve it get more…

Answer 30

inelastic