Price, Income & Cross Elasticities of Demand (1.2.3) Flashcards
What is Price Elasticity of Demand (PED)?
A measure of the responsiveness of Quantity Demanded for a product to a given change in its price. (When there is a change in Price what happens to the Quantity Demanded?)
What does PED look like on a graph?
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What’s the equation for working out percentage change?
((New-old)/old)x100 =Percentage change
What’s the equation for PED?
PED=% change in QD/ % change in Price
Calculate the PED if a 20% fall in the Price of petrol leads to a 2% increase in the Quantity Demanded
2/ -20= -0.1 (can ignore the minus sign)
Does this mean the Price is Elastic or Inelastic? (If -0.1)
Inelastic
What factors can affect PED? (6 Factors)
-Availability of Substitutes
-% Income spent on a product
-Type of Product
-Durability of Product
-Sustainability of Product
-Health benefits of Product
If the value is greater than 1 is Demand Elastic or Inelastic?
Demand is Elastic
If the value is less than 1 is Demand Elastic or Inelastic?
Demand is Inelastic
What will happen to the Demand Curve the more Elastic it is?
The more horizontal (—-)the Demand Curve Becomes
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What do each of the values of PED mean?
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What will happen to the Demand Curve the more Inelastic it is?
The more vertical (|) the Demand Curve Becomes
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What are the general rules of what you do with price if PED is elastic or inelastic?
If PED is Elastic, lower your price
If PED is Inelastic, increase your price
What does Price Inelasticity mean?
Its means Consumers are willing to buy your product because its normally a necessity. e.g. Petrol
What does Price Elasticity mean?
A product that when the price is raised consumers will start to not buy your product as it isn’t needed e.g. Luxury items. So what is ideal is if the price is decreased.
What is Income Elasticity of Demand (YED)?
A measure of the responsiveness of demand for a product to a given change in consumer income.
What’s the equation for YED?
YED=% change in QD/% change in Y (Income)
What Good is it when YED is in between 0 and +1?
Normal Goods (essential goods we buy regularly)
What Good is it when YED is greater than +1?
Superior Goods (High priced quality brands)
What Good is it when YED is negative?
Inferior Goods (Budget Brands we replace with expensive brands when income increases)
What do each of the values of YED mean?
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What are Luxury Goods?
Expensive Goods that we wouldn’t consider unless our income improves.
What are Normal Goods?
More essential Goods that we buy regurarly
What are Inferior Goods?
Budget brands bought when income falls.
What is Cross Elasticity of Demand (XED)?
A measure of the responsiveness of the demand for one product to a change in the price of another product.
What’s the equation for XED?
XED=% change in QD of Good A/ % change in price of Good B
When XED is positive what does this mean?
It means that when the Price of an alternative goes up and the Quantity Demanded goes up as well it means that its a substitute good.
When XED is Negative what does this mean?
It means that when the Price of an alternative goes up and the Quantity Demanded goes down it means that they are complimentary goods
If the value of XED is greater than +1 what does it mean?
Strong Substitutes
If the value of XED is inbetween 0-1 what does it mean?
Weak Substitutes
If the value of XED is greater than -1 what does it mean?
Strong Complements
If the value of XED isin between 0- (-1) what does it mean?
Weak Complements
What do each of the values of YED mean?
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