Elasticities Of Demand (XED) 4.1.3.2 Flashcards
Define XED
measures responsiveness of quantity demanded of good X in response to a price change of Good Y where both goods are related by being either a complement or substitute
XED formula
%change in QD good x /%change in price of Good y - we assume relationship if not XED - 0
What does it mean when XED is 0
It’s an independent good
Define a substitute
Goods/Services in competitive demand
What is the XED for substitutes
Positive - so graph upward sloping
Why is XED positive
increase in the price of one leads to an increase in the quantity demanded of the other
Some substitutes are close and there is little difference between them what does this mean for the consumer
there is little cost to switch brands if they wanna change spending
Examples of Substitues
Coke pepsi
Playstation and Xbox
What is a strong substitute relationship - include how graph look
Graph - less steep/wide &upward sloping
small increase in the price of X leads to a great increase in the quantity demanded of Y - SUGGESTING HIGHLY ELASTIC STRONG SUBSTITUTE RELATIONSHIP
What is a weak substitute relationship
graph - steeper (looks inelastic sort of )
big increase in the price of X leads to a relativley small increase in the quantity demanded of Y
What is a complement
Goods and services in joint demand - we tend to buy them together
What is the XED for complements
negative - so graph downward sloping
Why is XED negative
increase in the price of good X leads to a contraction in demand for X and a decrease in the quantity demanded of Good Y
What is a strong complemetary relationship and waht does the graph look like
Graph - less steep wide (sort of elastic)
Decrease in the price of X leads to a big increase in the quantity demanded for Y
What is a weak complementary relationship and what does the graph look like
Graph - more steep (sort of inelastic)
Big fall in the price of X leads to a marginal incerase in the QD of y
