3.2 price income and cross elasticity of demand Flashcards
the price elasticity of demand formula
percentage change in quantity demanded/
percentage change in price
when is the price elasticity of demand elastic or inelastic
it is elastic > 1
its is inelastic < 1
(+it is almost always negative)
what is the formula for income elasticity of demand
percentage change in quantity demanded/
percentage change in income
when is the income elasticity of demand (YEP) elastic and what type of good is associated with it
YEP> 0
normal goods
when is the income elasticity of demand (YEP) inelastic and what type of good is associated with it
YED<0
inferior goods - as income increases they will choose better goods over the inferior ones
what is the formula for cross price elasticity of demand
percentage change in quantity demanded of good A/
percentage change in price of good B
what does it mean if the cross price elasticity of demand is positive
the goods are substitutes
what does it mean if the cross price elasticity of demand is negative.
+ if it is close to 0
the goods are complements
the goods are likely unrelated
what does perfectly elastic demand mean
PED +/- infinity
any price increase will cause demand to drop to 0
its a perfectly horizontal line
what does perfectly inelastic demand mean
PED= 0
any price change won’t effect demand
perfectly vertical line
what would producers tend to do if the demand for their product is inelastic
increase price, as quantity sold won’t change too much
what would producers tend to do if the demand for their product is elastic
lower prices as it may increase sale so more revenue could be made
what kind of goods are inelastic
necessities, raw materials, addictive items like cigarettes
what kind of goods tend to be elastic
goods that are not essential
what effects the elasticity of a good
type of good
availably of substitutes- more = more elastic
percentage of income - higher = more elastic, TV v apple
time - more elastic in the long run, can fund alternatives with more time
