Elasticities

Question 1

What is income elasticity of demand (equation)?

Answer 1

Question 2

What do the different values of IED represent?

Answer 2

Question 3

What is the income consumption curve?

Answer 3

The ICC shows us the sign of the IED for two goods.

It’s just the sign as we don’t get a specific value.

In this graph we can see that on ICC₁ food is an inferior good because when income increased from L₁ to L₂ consumption of food decreased.

Question 4

What is price elasticity of demand (PED) and what do the values represent?

Answer 4

The amount that demand for a good changes relative to a 1% change in price.

The values are always negative.

Question 5

What are the different PED’s along the demand curve and why is it different?

Answer 5

At the lower point of the demand curve the quantity is high but the price is smaller so a percentage change in the price will be less in real terms but quantity change will be larger so PED is relatively elastic.

At the higher end of the demand curve the price is a larger number and qty lower so in real terms the change in price will be larger and quantity smaller, this makes it more inelastic.

Question 6

What do demand curves look like for the different price elasticities?

(Perfectly inelastic, perfectly elastic, slightly inelastic, slightly elastic)

Answer 6

Question 7

What are the factors that determine price elasticity of demand (PED)?

Answer 7

1. Availability of substitutes
2. Length of adjsutment period
   
   1. substitution takes time
3. Proportion of consumer’s budget that good represents

Question 8

What is cross price elasticity of demand?

Answer 8

Measure the effect of a change in price of one good on the demand for another good.

Question 9

What do the values of XED mean?

Answer 9

>0 = Substitutes

<0 = Complements

0 = Unrelated