EREC Quiz 4 Flashcards
Cross Price-Elasticity (of demand):
Percentage change in quantity purchased of ONE GOOD that
occurs as a result of a 1 percent change in the price of ANOTHER GOOD
Substitutes:
products that are usually considered a replacement for each other. Products that are
related such that an increase in the price of one will cause an increase in DEMAND for the other
Complements:
products that are usually consumed jointly. An increase in the price of one will cause
DEMAND for the other to fall
Independent:
the price of one good DOES NOT affect the quantity demanded of another good
Income elasticity (of demand):
Percentage change in quantity purchased of ONE GOOD that occurs as a result of a 1 percent change in INCOME
Normal goods:
IF consumption of a good goes up as income goes up. This is what we normally expect, that when people make more money, they will feel richer and buy more of most goods.
Inferior goods:
IF consumption of a good goes down as income goes up. This is the opposite of what we normally expect. Perhaps making more money changes the quality of goods that people buy?
Luxury goods:
a good for which demand increases more than what is proportional as income rises, so that expenditures on the good become a greater proportion of overall spending. These good are
Interpreting income elasticities:
Ξ·x1,M > 0, π΅πππππ
Ξ·x1,M< 0, π°πππππππ
Ξ·x1,M > 1, π³πππππ
Ξ·x1,M < 1, Necessity
X1 = good, M = income
βincome elasticity of demand for X1β
Necessity goods:
product(s) and services that consumers will buy regardless of the changes in their income levels. The quantity consumed of necessity goods doesnβt change much when income changes.
Elasticity
Always of quantity with respect to price
Cross Price Elasticity if Elastic or not
EX1,P2 > 0, Substitutes
EX1,P2 < 0, Complements
EX1,P2 = 0, Independent
Income Elasticity of Demand Formula
- Percentage Change in Quantity Demand / Percentage Change in
Income - ((D1-D0)/(D1+D0)) / ((I1 - I0) - (I1 + I0))
