Price, Income and Cross Elasticities of Demand

Question 1

Complements

Answer 1

Two complements are said to be in joint demand. Examples include fish and chips, iron ore and steel, hardware and software for digital products.

Question 2

Cross price elasticity of demand

Answer 2

Responsiveness of demand for good X following a change in the price of good Y (a related good). With cross price elasticity, we make an important distinction between substitute products and complementary goods and services.

Question 3

Derived demand

Answer 3

Derived demand is demand that comes from (is derived) from the demand for something else. Thus, the demand for machinery is derived from the demand for consumer goods that the machinery can make. If there is low demand for consumer
goods, there is low demand for the machinery that can make them. Demand for bricks is derived from spending on new construction projects.

Question 4

Elastic Demand

Answer 4

Demand for which the coefficient of price elasticity of demand is greater than 1.

Question 5

Income elasticity of demand

Answer 5

Measures the relationship between a change in quantity demanded and a change in real income. The formula for income elasticity is: percentage change in quantity demanded divided by the percentage change in income.

Question 6

Inelastic demand

Answer 6

When the coefficient of price elasticity of demand is less than 1. (Ped<1)

Question 7

Inferior good

Answer 7

When demand for a product falls as real incomes increases. Income elasticity is negative.

Question 8

Luxury good

Answer 8

Luxury goods and services have an income elasticity of demand with a coefficient of more than +1 i.e. a 5% rise in real incomes might lead to an increase in demand of 20% giving a coefficient of YED of +4.

Question 9

Necessities

Answer 9

Necessities typically have a low own-price elasticity of demand (consumers are not sensitive to a change in price) and a low but positive income elasticity of demand (YED >0 but

Question 10

Normal goods

Answer 10

Normal goods have a positive income elasticity of demand. Necessities have a coefficient of income elasticity of demand of between 0 and +1. Luxuries have income elasticity > +1 demand rises more than proportionate to a change in income.

Question 11

Price elasticity of demand

Answer 11

Price elasticity of demand measures the responsiveness or sensitivity of demand for a product following a change in its own price.

Question 12

Real income

Answer 12

The money earned from employment after the distorting effects of inflation have been removed.

Question 13

Substitutes

Answer 13

Goods in competitive demand that act as replacements for another product.

Question 14

Total revenue

Answer 14

The amount of money earned by a firm from selling its output.

Question 15

Total revenue formula

Answer 15

TR = P X Q

Question 16

Unit elasticity of demand

Answer 16

A demand curve with unitary price elasticity has a coefficient of PED equal to 1 (unity) throughout. Total spending on the product will be the same at each price level. Government intervention will not affect total spending on the product.

Question 17

Unrelated goods

Answer 17

Goods or services that have no relationship between them in which case the crossprice elasticity of demand will be zero.