4- Price/income/cross-elasticities definitions

Question 1

Price elasticity of demand (PED)

Answer 1

The responsiveness of demand to a change in price.

Question 2

Cross elasticity of demand (XED)

Answer 2

The responsiveness of demand for one good (A) to a change in price of another (B).

Question 3

Inferior goods

Answer 3

YED<0; goods which see a fall in demand as income increases.

Question 4

Luxury goods

Answer 4

YED>1; an increase in incomes causes an even bigger increase in demand.

Question 5

Normal goods

Answer 5

YED>0; demand increases as income increases.

Question 6

Perfectly price elastic good

Answer 6

PED= infinity; quantity demanded falls to 0 when price changes.

Question 7

Perfectly price inelastic good

Answer 7

PED=0; quantity demanded doesn’t change when the price changes.

Question 8

Relatively price elastic good

Answer 8

When PED>1;
Demand is relatively responsiveness to a change in price so a small change in price leads to a large change in quantity demanded.

Question 9

Relatively price inelastic good

Answer 9

When PED<1;
Demand is relatively unresponsiveness to a change in price so a large change in price leads to a large change in quantity demanded.

Question 10

Unitary price elastic good

Answer 10

When PED=1;

A change in price leads to a change in demand by the same proportion.