LS15 - Cross Price & Income Elasticity of Demand Flashcards
What is cross price elasticity of demand (XED)?
Measures the responsiveness of demand for one good given the change in price of another good
What is the formula for Cross Price Elasticity of Demand?
% change of quantity demanded of product A
XED = ———————————————————————
% change of price of product B
What does a positive XED value mean?
The products are substitutes
What does a negative XED value mean?
The products are complements
What does 0 as an XED value mean?
There is no relationship
What does a higher XED number mean?
The substitutes/complements are close
What is income elasticity of demand (YED)?
Measures responsiveness of demand given a change in income
What does a positive YED value mean?
The product is a normal good
What does a negative YED value mean?
The product in an inferior good
What happens when a normal good has a YED value between 0 & 1?
The product is an inelastic good - tend to be necessities
What happens if a product has a YED value is above 1?
The product is income elastic - a luxury
What is a normal good?
With higher income, consumers continue using a good
What is an inferior good?
With higher income, consumers stop using the good
