4.1.3.2 Price, income and cross elasticities of demand

Question 1

Elasticity

Answer 1

A measure of how much one variable changes in response to a change in another variable.

Question 2

Price elasticity of demand

Answer 2

A measure of the responsiveness of a change in demand for a good or service to a change in its own price.

Question 3

PED equation

Answer 3

% change in quantity demanded / % change in price

Question 4

Why is PED always negative?

Answer 4

Price and demand have an inverse relationship.

Question 5

What are the types of PED?

Answer 5

perfectly elastic = PED= infinity
elastic = PED >1
Unitary = PED=1
inelastic = PED<1
perfectly inelastic= PED=0

Question 6

What does a perfectly elastic demand curve look like?

Answer 6

A perfectly elastic demand curve shows that the demand is infinite at a specific price. Thus, a change in price would eliminate all demand for the product.

Question 7

What does a relatively elastic demand curve look like?

Answer 7

quantity demanded changes by a larger percentage than price, so demand is relatively responsive to price.

Demand will decrease by a larger percentage than price increased and vice versa

Question 8

What does a unitary elastic demand curve look like?

Answer 8

With a demand curve of unitary price elasticity, a change in price is met with an equal change in demand
This means that total spending by consumers on the product will remain the same at each price level

Question 9

What does a relatively inelastic demand curve look like?

Answer 9

Quantity demanded changes by a smaller percentage than price, so demand is relatively unresponsive to price.
Could be because they are less substitutes, could be necessities

Question 10

What does a perfectly inelastic demand curve look like?

Answer 10

With a perfectly inelastic demand, there is no change in the demand for a product with a change in its price. This means that the demand remains constant for any value of price.

Question 11

what are factors affecting PED?

Answer 11

Substitutes, Percentage of income, Luxury/necessities, Addictive/habit, Time period

Question 12

If value of PED is between -1 and 0

Answer 12

price inelastic, given change in price, change in demand is smaller

Question 13

If value of PED is = -1

Answer 13

unit elastic, % change in price = % change in QD

Question 14

If value of PED is less than -1

Answer 14

price elastic, given change in price, there is a larger change to quantity demanded

Question 15

PED along a demand curve

Answer 15

gets more elastic as price rises

gets more inelastic as price falls

Question 16

Factors influencing ped- 1. Substitutes

Answer 16

High availability = price elastic, an increase in price would cause many consumers to substitute the more expensive good for a cheaper good. More substitutes = more cheaper or expensive prices so more switching so more change to QD

Question 17

Factors influencing ped- 2. Degree of Necessity

Answer 17

More necessary the more inelastic, demand is relatively constant as good is required more, so despite price increase or decrease, they will continue to purchase good because of high requirement rate

Question 18

Factors influencing ped- 3. Time

Answer 18

In the short term, less chance for consumers to change their choice and substitute to another product. In the long run, more substitutes become available and their is a greater time to be able to switch

Question 19

Factors influencing ped- 4. Consumer Knowledge

Answer 19

If poor knowledge of substitutes, then there is greater inelasticity because less chance of switching occurring and change to QD is smaller

Question 20

Factors influencing ped- 5. Prop, of disp. income

Answer 20

Greater the proportion the more elastic, because more to gain or lose when products increase or decrease in price

Question 21

Factors influencing ped- 8. Brand loyalty

Answer 21

The more persuasive the advertising and the more loyal, then the lower the chance of switching to another product thus there is more inelastic ped

Question 22

income elasticity of demand

Answer 22

measure of how much the quantity demanded of a good responds to a change in consumers’ income

Question 23

Income Elasticity of demand YED=

Answer 23

%change in QD/%change in income

Question 24

If YED is between 0 and 1

Answer 24

necessity good, a change in income doesn’t change QD considerably, shifts in demand are low

Question 25

If YED is greater than 1

Answer 25

luxury good a change in income creates a large change in demand

Question 26

If YED is less than 0

Answer 26

inferior good, negative as when income increases QD will fall, and when income decreases QD will rise so inverse relationship

Question 27

cross-price elasticity of demand

Answer 27

a measure of how much the quantity demanded of one good responds to a change in the price of another good

Question 28

XED =

Answer 28

% change in demand for good x/ % change in price for good y

Question 29

If XED > 0

Answer 29

substitutes because as price for y increases the demand for good x will increase, and as price for y falls so too will demand for x. Consequently always positive, further from zero the stronger the substitutability

Question 30

If XED < 0

Answer 30

Complements so a increase in price for y will decrease demand for x and a fall in price for y will increase demand for x so inverse relationship

Question 31

If XED = 0

Answer 31

unrelated goods

Question 32

Factors influencing YED

Answer 32

Whether the good is a necessity or a luxury
Standard of living (for the country)
Health of the economy

Question 33

Luxuries effect on yed

Answer 33

As incomes rise, consumers will move towards spending more of their income on luxuries

Question 34

Standard of living effect on yed

Answer 34

Wealthier countries are likely to have consumers with higher disposable incomes
Therefore, consumers are likely to use some of this income to buy luxury goods and services
As a result, firms will produce ‘superior’ products that meet the needs of these consumers

Question 35

Health of the economy effect on yed

Answer 35

When the economy is declining, disposable incomes fall
Therefore, consumers spend a reducing prop. of their income on luxury goods, moving to necessities and then inferior goods