4- Price/income/cross-elasticities

Question 1

PED equation

Answer 1

PED=

% change in quantity demanded / % change in price

Question 2

Unitary elastic PED

Answer 2

PED = 1

Question 3

Relatively elastic PED

Answer 3

PED>1

Question 4

Relatively inelastic PED

Answer 4

PED<1

Question 5

Perfectly elastic PED

Answer 5

PED= infinity

Question 6

Perfectly inelastic PED

Answer 6

PED=0

Question 7

Factors affecting PED

Answer 7

Substitutes
Percentage of income
Luxury/ necessity
Addictive/ habit-forming
Time lag

Question 8

PED in the short run

Answer 8

Inelastic

Question 9

PED in the long run

Answer 9

Elastic

Question 10

YED equation

Answer 10

YED=

% change in quantity demanded / % change in income

Question 11

Inferior good YED

Answer 11

YED <0

Question 12

Normal good YED

Answer 12

YED>0

Question 13

Luxury good YED

Answer 13

YED>1

Question 14

Elastic YED

Answer 14

YED>1

Question 15

Inelastic YED

Answer 15

YED<1

Question 16

Importance of a firm knowing YED

Answer 16

• To know how their sales will be affected by changes in the income of the population.
• It may impact the type of good a business produces
  e. g. Luxury goods during a boom.

Question 17

XED equation

Answer 17

XED=

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

Question 18

Substitute goods XED

Answer 18

XED>0

Question 19

Complementary goods XED

Answer 19

XED<0

Question 20

Unrelated goods XED

Answer 20

XED=0

Question 21

XED- the importance of the size of the number

Answer 21

The bigger the number, the stronger the relationship between the two goods.

Question 22

Importance of firms knowing XED

Answer 22

• Firms need to be aware of competition and those producing complementary goods.
• Need to know how price changes by other firms will impact them so they take appropriate action.