Demand and Elasticity of Demand Flashcards
What is demand
The quantity of a good or service that consumers are willing and able to purchase at a given price in a given time period
Why is the demand curve downwards sloping
Real income effect - purchasing power of income falls
Substitution effect - if the price of one good rises people will swap to alternatives
What causes a shift in the demand curve
-consumer taste
-income
-price of substitutes
-price of compliments
-speculation
What is price elasticity of demand
The responsiveness of demand to a change in price
What is the formula for PED
%change in quantity demanded / %change in price
When is a good price elastic (PED)
PED is greater than one
When is a good price inelastic (PED)
When PED is less than one
What is unit elasticity
When PED = 1
What determines the PED
-number of close substitutes
-habits
-proportion of income spent on the good
-postpone-ability of purchase
What is cross elasticity of demand (XED)
The quantity demanded of one good in response to a change in price of another
What is the formula for XED
%change in quantity demanded of good a / %change in price of good b
What does a positive XED mean between 0 and 1
Weak Substitutes
What does a positive XED mean greater than 1 mean
Strong substitutes
What does a negative XED mean between 0 and -1
Weak complements
What does a negative XED mean less than minus 1
Strong complements
