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Edexcel A Economics Themes 1 and 2 > Micro 6 - Income Elasticity of Demand and Cross Elasticity of Demand > Flashcards

Micro 6 - Income Elasticity of Demand and Cross Elasticity of Demand Flashcards

1
Q

Define Income Elasticity of Demand

A

Income Elasticity of Demand measures how much the demand for a good changes with a change in real income

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2
Q

What is the abbreviation for Income Elasticity of Demand?

A

YED

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3
Q

What is the formula for calculating Income Elasticity of Demand?

A

Percentage change in quantity demanded of a good / Percentage change in real income

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4
Q

Is YED a percentage?

A

No

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5
Q

What are the 3 different categories that YED can be?

A
  • Elastic
  • Inelastic
  • Perfectly inelastic
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6
Q

What does the YED value have to be for a product to have income elastic demand?

A

Greater than 1

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7
Q

What does a YED value of greater than 1 mean for a product?

A

It has income elastic demand

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8
Q

What does the YED value have to be for a product to have income inelastic demand?

A

Less than 1

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9
Q

What does a YED value of less than 1 mean for a product?

A

It has income inelastic demand

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10
Q

What does the YED value have to be for a product to have perfectly income inelastic demand?

A

0

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11
Q

What does a YED value of 0 mean for a product?

A

It has perfectly income inelastic demand

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12
Q

What does a YED value of 5.4 mean?

A

For every 1% increase in incomes, demand increases by 5.4%

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13
Q

What does it mean for a product to have perfectly income inelastic demand?

A

No matter how high incomes rise, demand remains constant

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14
Q

Define Cross Elasticity of Demand

A

Cross Elasticity of Demand is a measure of how the quantity demanded of one good responds to a change in the price of another good

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15
Q

What abbreviation is used to describe Cross Elasticity of Demand?

A

XED

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16
Q

What is the formula for calculating Cross Elasticity of Demand?

A

Percentage change in quantity demanded of good A / Percentage change in price of good B

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17
Q

If two goods are substitutes will their XED be positive or negative?

A

Positive

18
Q

If two goods are complementary will their XED be positive or negative?

A

Negative

19
Q

Do Normal goods have a positive or negative YED sign?

A

Positive

20
Q

What type of good will a normal good be with a YED figure between 0 and 1?

A

A Necessity

21
Q

What effect does rising incomes have on the demand for normal goods?

A

It causes demand to increase

22
Q

What type of good will a normal good be with a YED figure of greater than 1?

A

A Luxury good

23
Q

Define a Necessity good in terms of YED

A

A Necessity good is a good for which the income elasticity of demand is positive and between 0 and 1

24
Q

Define a luxury good in terms of YED

A

A good for which the income elasticity of demand is positive and greater than 1

25
Q

What are normal goods?

A

Normal goods are those which people will demand more of if their real income increases.

26
Q

What are inferior goods?

A

Inferior goods are those which people demand less of if their real income increases.

27
Q

Do inferior goods have a positive or negative YED sign?

A

Negative

28
Q

What will the YED figure be for an inferior good?

A

Less than 0

29
Q

Define inferior goods in terms of YED

A

Inferior goods have a YED figure which is negative and less than 0

30
Q

What effect will a rise in income have on an inferior good?

A

A rise in income will lead to the inferior good being replaced with one considered to be of higher quality

31
Q

Do substitute goods have positive or negative XEDS

A

Positive

32
Q

Explain substitute goods in terms of XED

A

A fall in the price of one substitute will reduce the demand for another. The closer the substitutes, the higher the positive XED

33
Q

What XED figure indicates a strong relationship between two products?

A

An XED figure greater than 1

34
Q

What XED figure indicates a weak relationship between two products?

A

An XED figure of less than 1

35
Q

Will complementary goods have a positive or negative XED sign?

A

Negative

36
Q

Explain complementary goods in terms of XED

A

An increase in the price of a good will lead to a reduction in demand for its complements

37
Q

What does it mean if a good has an XED of 0?

A

Goods which have an XED of 0 are independent or unrelated and don’t directly affect the demand of each other

38
Q

How can information about YED be used by firms and governments?

A
  • Sales forecasting
  • Pricing Policy
  • Supplying a range of goods with various YEDs
39
Q

How can information about YED be used in sales forecasting?

A

If the YED of a product and likely changes in income are known then sales levels can be predicted

40
Q

How can information about YED be used in pricing policy?

A

A reduction in price for a normal good when there is an expected fall in incomes may limit the expected reduction in demand for the good

41
Q

Why might a firm choose to supply a range of goods with various YEDs?

A

During a boom demand for a product with a high YED will increase but demand for that product will decrease when the economy is in a recession. So a firm may also supply products with a low YED so that they can still earn revenue during a recession

42
Q

How might firms and governments use knowledge of XEDs for their goods?

A

It’s useful for firms to know the XEDs of their goods because that will tell them how to react to changes in the price of related products to ensure they maximise demand for their products

Edexcel A Economics Themes 1 and 2 (25 decks)

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