Micro: 1.2.3 Price, income and cross elasticities of demand Flashcards
What does Price Elasticity of Demand (PED) measure?
PED measures the responsiveness of quantity demanded to a change in price.
What does Income Elasticity of Demand (YED) measure?
YED measures the responsiveness of quantity demanded to a change in income.
What does Cross (Price) Elasticity of Demand (XED) measure?
XED measures the responsiveness of quantity demanded for one good to a change in the price of another good.
What is the formula for Price Elasticity of Demand (PED)?
PED = % change in Quantity Demanded / % change in Price
What is the formula for Income Elasticity of Demand (YED)?
YED = % change in Quantity Demanded / % change in Income
What is the formula for Cross Elasticity of Demand (XED)?
XED = % change in Quantity Demanded of good x / % change in Price of good y
Can YED and XED be positive or negative?
Yes, YED and XED may be positive or negative.
What do these values show about PED (elastic etc)?
What do these values say about YED (elastic etc)
What do these values say bout XED (substitutes etc)
What factors influence Price Elasticity of Demand (PED)?
The factors that influence PED include the availability of substitutes, the addictiveness of the product, time, and the price of the product as a proportion of income.
Why is PED important for firms?
PED is important to firms in determining their pricing strategy: if demand is inelastic, then an increase in price leads to an increase in total revenue, and a fall in price reduces total revenue; if PED is elastic, then a rise in price reduces total revenue and a fall in price increases total revenue.
How does PED affect taxation?
PED is important to governments in understanding the burden of taxation on producers and consumers. The more price inelastic the good, a greater proportion of the tax is paid by the consumer than the producer.
What is the impact of PED on subsidies?
For subsidies, the more price inelastic the good, the greater the price fall for consumers.
What should firms consider regarding YED?
Firms should consider the YED of products; if analysis of YED shows demand for their product is income elastic and the economy experiences a recession, demand is likely to fall significantly.
What does XED indicate for a firm?
XED will tell a firm how demand for their own product will change following a price change by their competitors or partners.
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