Income Elasticity of demand

Question 1

Define income elasticity of demand

Answer 1

YED measures the responsiveness of demand to changes in income

Question 2

Formula for YED

Answer 2

The formula for income elasticity is: percentage change in quantity demanded divided by the percentage change in income.

Question 3

Define inferior good

Answer 3

When demand for a product falls as real incomes increase (so demand rises as incomes fall).
- Income elasticity is negative.
- everyday value alternative in a supermarket is an example

Question 4

define normal good

Answer 4

• Normal goods have a positive income elasticity of demand.
• demand rises more than proportionate to a change in income
• demand for normal goods rise with a rise in income and vice versa

Question 5

What is the YED for necessities

Answer 5

• Necessities have a coefficient of income elasticity of demand of between 0 and +1.

Question 6

What is the YED for luxuries

Answer 6

• Luxuries have income elasticity > +1
• examples: dining at high class restaurants or foreign travel

Question 7

What is the significance of YED

Answer 7

It is important for businesses to know how their sales will be affected by changes in the income of the population . If the economy is improving and people’s incomes are rising it is vital that a business knows whether this is likely to increase their sales or not

Question 8

Define cross price elasticity of demand

Answer 8

XED measures the responsiveness of demadn for one good to changes in the price of another good

Question 8

Define cross price elasticity of demand

Answer 8

XED measures the responsiveness of demadn for one good to changes in the price of another good

Question 9

What is XED of substitute goods

Answer 9

Positive XED bc substitute effect
- fall in the price of one substitute will reduce demand for another

Question 10

What is the XED of complement goods

Answer 10

Negative goods
- increase in the price of a good leads to a fall in demand for complemente

Question 11

What is the XED of goods that have no relationship

Answer 11

0

Question 12

Define unrelated goods

Answer 12

Goods or services that have no relationship between them in which case the cross-price elasticity of demand will be zero.

Question 13

XED formula

Answer 13

%change in quantity demanded of A/%change in price of B.

Question 14

the closer the subtitutes …

Answer 14

the higher the positive XED

Question 15

significance of XED

Answer 15

Firms need to be aware of their competition and those producing complementary goods. They need to know how price changes by other firms will impact them so they can take appropriate action.

Question 16

Significance of XED AND YED

Answer 16

ref to page 21 CGP