LS15- XED and YED

Question 1

Cross elasticity of demand (XED)

Answer 1

Measures the responsiveness of demand for one good to changes in the price of another good
XED= ±% in demand for QD of A/±% price of product B
Positive XED- demand for A increases as price of B increases
Negative XED- demand for A decreases as price of B increases
Part Season Near Christmas (positive substitute negative complement)

Question 2

Income elasticity of demand (YED)

Answer 2

Measures the responsiveness of demand to changes in income
YED= ±% demand/ ±% income

Question 3

Inferior goods

Answer 3

Those which see a fall in demand as income increases. For example, the ‘value’ options at supermarkets could be seen as inferior. As income increases, consumers switch to branded goods.
YED<0 so they have a NEGATIVE YED

> 1 demand is income elastic
<1 demand is income inelastic

Question 4

Normal goods

Answer 4

Demand increases as income increases
YED>0 POSITIVE YED

> 1 demand is income elastic, normal luxury
<1 demand is income inelastic, normal necessity

Question 5

Luxury goods

Answer 5

An increase in income causes an even bigger increase in demand
YED>1 e.g. a holiday
They are also normal goods and they have an elastic income

• during times of prosperity, such as an economic growth when real incomes are rising, firms might switch to producing more luxury goods and fewer inferior goods, because demand for luxury goods will be rising