Price, Income and Cross-Elasticity of Demand

Question 1

What is PED?

Answer 1

Measures the responsiveness of quantity demanded to a change in price of the good.

Question 2

What is the formula for PED?

Answer 2

%change in quantity demanded /

%change in price

Question 3

What factors determine PED?

Answer 3

• Availability of substitutes
• Time
• Whether the good is a luxury or necessity
• Proportion of income spent on the good

Question 4

What is Price Elastic?

Answer 4

• PED less than -1
• A fall in price means quantity demanded rises by proportionally more than the price cut
• A fall in price will increase total revenue

Question 5

What is Price Inelastic

Answer 5

• PED between 0 and -1
• When price fall, quantity demanded increases but by a smaller proportion than the fall in price
• Quantity demanded is relatively unresponsive to price changes
• When price falls, total revenue will fall

Question 6

PED = 0?

Answer 6

• Perfectly Inelastic

- A fall in price has no effect on quantity demanded

Question 7

PED = infinite?

Answer 7

• Perfectly Elastic

Question 8

PED = -1?

Answer 8

• Unitary Price Elastic Demand

- When the price falls, quantity demanded rises proportionally and TR stays the same

Question 9

What is YED?

Answer 9

• Income Elasticity of Demand

- Measures the responsiveness of quantity demanded to a change in income

Question 10

What is the formula for YED?

Answer 10

%change in quantity demanded/

%change in income

Question 11

What does it mean if the YED is positive?

Answer 11

Good is a normal good

Question 12

What does it mean if the YED is negative?

Answer 12

Good is an inferior good

Question 13

How do you know if the good is Income Elastic or Inelastic?

Answer 13

• When the YED is between 0 and 1 or 0 and -1 = inelastic

- When the YED is above 1 or less than -1 = elastic

Question 14

What is XPED?

Answer 14

• Cross Price Elasticity of Demand

- Measures the responsiveness of quantity demanded of one good to a change in the price of another good

Question 15

What is the formula for XPED?

Answer 15

%change of quantity demanded of good A/

%change in price of good B

Question 16

What does it mean if the XPED is positive?

Answer 16

• Two goods are substitutes
• Lower the XPED, the weaker the substitute
• Larger the XPED, the stronger the substitute

Question 17

What does it mean if the XPED is negative?

Answer 17

• Two goods are complements
• The closer the XPED is to 0, the weaker the complement
• The further the XPED is to 0, the stronger the complement

Question 18

XPED = 1?

Answer 18

• Two goods are substitutes
• A rise in price of one good will increase the quantity demanded of another good by a proportionate amount
• Unitary Cross Price Elastic
• Sometimes expressed as Unity

Question 19

XPED = 0?

Answer 19

The goods are independent of each other