Price, Income & Cross Elasticities of Demand 1.2 Flashcards
PED
4
Measures the responsiveness of demand to changes in price
Percentage change in quantity demanded / percentage change in price
Always a negative value
Between -1 to 0 = Inelastic
Over -1 = Elastic
Cross Elasticity of Demand (XED)
3
Measures the responsiveness in demand of one good to a change in the price of another good
Percentage change in quantity demanded of Good A / Percentage change in price of Good B
Complementary goods will likely have an XED of over -1 (e.g. Printers & ink cartridges)
Less complementary goods between 0 - -1 (e.g. bread & butter)
Substitute goods will have a positive XED (e.g. Coca Cola & Pepsi)
Christmas Now Party Season - Compliments Negative, Positive Substitutes
Factors affecting PED
3
Marketing & Branding - Strong marketing can create brand loyalty, lowering PED
Proportion of Income spent on the good - A 20% increase in a TV’s will have more of an effect than 20% on salt price, as a larger percentage of income is spent on the TV - thus TV more elastic
Necessity or Luxury - Necessity’s tend to have lower PED than luxury as people will buy them regardless
Availability of substitutes - No substitutes will mean PED should be inelastic
Addictive - Very inelastic PED
Income Elasticity of Demand (YED)
Measures the responsiveness of quantity demanded in relation to a change in income
Percentage change in quantity demanded / Percentage change in income
Goods with a positive YED are known as ‘normal goods’
YED greater than 1 are known as ‘luxury goods’
YED less than 1 are necessities
Negative YEDs are inferior goods (we buy less of as income rises e.g. Bus tickets)
Normal goods
Positive YED
Luxury Goods
YED greater than 1
e.g. sports cars
Necessities
YED less than 1
Inferior Goods
Negative YED
We buy less of as income rises e.g. bus tickets
