Income and cross elasticity of demand - YED and XED

Question 1

Define YED

Answer 1

A measure of the responsiveness of the quantity demanded of a product to a change in income in % terms

Question 2

Give an equation of YED

Answer 2

%change in QD / %change in income

Question 3

YED for inferior normal and luxury goods

Answer 3

Inferior – fall in demand as income increases YED<0
Normal – rise in demand as income increased YED>0
Luxury – much larger rise in demand as income increases YED>1

Question 4

Influences of YED

Answer 4

Influenced by how necessary the good is and the level of income of the consumer

Question 5

Define XED

Answer 5

XED cross elasticity of demand = A measure of the responsiveness of the quantity demanded of a product to a change in the price of another product in % terms

Question 6

Give an equation for XED

Answer 6

%change in QD of product X / %change in price of Y

Question 7

Complementary, substitute and unrelated XED

Answer 7

Complementary – XED<0 – one good price increases QD for both fall
Substitutes - XED>0
Unrelated – XED=0

Question 8

What influences XED

Answer 8

How closely related the goods are

Question 9

Why are firms interested in XED

Answer 9

Firms are interested in XED as it allows them to see how many competitors they have and so are less likely to be affected by price changes by other firms if they’re selling complementary or substitute goods

Question 10

-ve XED means

Answer 10

Complementary good

Joint demand

Question 11

+ve XED means

Answer 11

substitute good

Question 12

-ve YED means

Answer 12

inferior good

Question 13

+ve YED means

Answer 13

normal good

Question 14

YED = 0 means

Answer 14

perfectly income elastic