Market Analysis Flashcards
Define ‘price elasticity of demand’.
Quantifies how much quantity demanded changes following a change in price.
How do you calculate ‘price elasticity of demand’?
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
Define ‘inelastic’.
A change in price leads to a smaller change in demand e.g. necessities, no competition (unique products), very cheap products, products with high brand loyalty.
Define ‘elastic’.
A change in price leads to a much greater change in demand e.g. luxuries, businesses with lots of competition, expensive goods, products with no brand loyalty.
Define ‘income elasticity of demand’.
Quantifies how much quantity demanded changes following a change in income.
Define ‘income elasticity of demand’.
Quantifies how much quantity demanded changes following a change in income.
How do you calculate ‘income elasticity of demand’?
Income Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
What does a ‘negative’ income elasticity show?
An inferior good.
What does an income elasticity between ‘0 and 1’ show?
A normal good (necessities).
What does an income elasticity ‘greater than 1’ show?
Normal good (luxury).
Define ‘inferior good’.
As income rises, demand falls (cheap second-hand goods, own branded products).
Define ‘inelastic normal good’.
As income rises, demand rises by a smaller amount (necessity goods, e.g. milk, bread).
Define ‘elastic normal good’.
As income rises, demand rises by a larger amount (luxury goods, e.g. cars, holidays).
