PED, YED & XED

Question 1

Price Elasticity of Demand (PED)

Answer 1

PED: Responsiveness of quantity demanded to change in price of products
- PED = % △ in Qd / % △ in P

• Elastic: PED > 1, Qd sensitive to change in price
• Inelastic: PED: 0-1, Qd remains stable after price change
• Unitary: PED = 1, change in P directly proportional to change in Qd
• Perfectly Elastic: PED = 0, demand does not change when price changes

Question 2

Factors Affecting PED

Answer 2

• Availability of Close Substitutes: High no. of substitutes increases PED. More substitutes = More Elastic
• Relative Expense of Product: If price is small proportion of income, will be inelastic. More expensive = More elastic (e.g luxury good)
• Nature of Product: Necessity = Inelastic, if unnecessary, is elastic. Addictive products = inelastic
• Time: Short Run, difficut to change habits. If not urgent, usually Inelastic

Question 3

Income Elasticity of Demand (YED)

Answer 3

Income Elasticity of Demand: Responsiveness of change in demand to change in income
- YED = % △ in Qd / % △ in Y

Question 4

Cross Elasticity Of Demand (XED)

Answer 4

Cross Elasticity of Demand: Responsiveness of a change in demand of one good, X, to a change in price of another good, Y
- XED = % △ in Qd of X / % △ in P of Y

• Allows firms to see how many competitors
  they have. Therefore, they are less likely to be affected by price changes by other
  firms, if they are selling complementary goods or substitute

Question 5

Normal, Inferior & Luxury Goods

Answer 5

• Normal Goods: Demand increases as income increases, YED >0 (E.g clothes, eating out)
• Inferior Goods: Goods that fall in demand as income increases, switch to branded goods, YED < 0 (E.g bus travel, unbranded goods)
• Luxury Goods: Increase in income causes bigger increase in demand, YED > 1 (E.g holidays)
• When real incomes are rising, firms might switch to producing more luxury goods & fewer inferior goods, demand for luxury goods will be increasing

Question 6

Complements, Substitutes & Unrelated Goods

Answer 6

Complementary Goods: Negative XED. If 1 good becomes more expensive, Qd for both goods will fall
- Close Complements: Small fall in price of good X leads to a large increase in QD of Y
- Weak Complements: Large fall in the price of good X leads to small increase in QD of Y

Substitutes: Can replace another good, XED is positive, demand curve is
upward sloping
- Close Substitutes: Small increase in price of good X leads to a large increase in QD of Y
- Weak substitutes: Large increase in price of good X leads to a smaller increase in QD of Y.

• Unrelated Goods: XED = 0. E.g price of a bus journey has no effect on demand for tables

Question 7

Elasticities of Demand (Application)

Answer 7

Price Elastic: Furniture stores have many substitutes, rise in price will cause large fall in demand

Price Inelastic: Electric & Water industries natural monopolies , few substitutes available, small fall in emand after price rise

Perfectly Elastic: Book stores, not realistic

Perfectly Inelastic: Lifesaving Medicine, bought regardless of price, e.g Martin Shrekli

Unitary Elastic: Clothing, changes in proportion