price , income & cross elasticities Flashcards
Elastic
- very responsive = change in price = bigger change in demand
- luxury goods
- PED > 1
inelastic
-unresponsive to change in price
- steep graph
- addictive + necessary goods
- PED < 1
Unitary elastic
- equal change
- curved , two points are equal
- PED = 1
price : perfectly inelastic
- demand doesn’t change when price does
- vertical
- PED = 0
perfectly elastic
- horizontal
PED = infinity
Factors influencing PED
1) Necessity
2) Substitutes - more sub more elastic
3) Addictiveness
4)Proportion of income
if good takes up large proportion - elastic
5)brand loyalty
if a good has an inelastic demand , the firm raises its price , quantity sold will not fall significantly. This will increase total value.
income elasticity of demand
responsiveness of a change in demand to a change in income
YED = change % in quantity demand
———————————————
percentage change in income
income elasticity helps with ?
businesses understand how consumers change thier spending during recessions
FORMULA FOR PRICE ELASTICITY
%change in quan demanded
——————————————
%change in price
price elasticity PED measures
how much quantity demanded will respond to change of price
income elasticity FORMULA (YED)
% chnage in quan demanded
—————————————-
%change in income
YED for inferior goods
are always negative because as income goes down demand goes up
YED for Normal goods is
always positive because as income rises , demand rises
income inelastic range
0-1
income elastic range
1-infinity
PED is always negative/positive ?
negative
PED is always negative/positive ?
negative
what does XED CROSS ELASTICITY measure
calculated how competing firms prices will affect demand for their products
measures how the quantity demanded for one food will respond to a change of price of another
FORMULA FOR XED CROSS ELASTICITY
%change in QD of A (the affected)
——————————
%change in price of B
the XED for complementary is :
negative because an increase in price for one food will decrease the demand for the other complement
XED for substitutes is :
positive because a decrease in price of one good will decrease demand for a substitute
XED = 0 means it’s unrelated goods
