Theme 1.2.3 Income and elasticities (unit 10)

Question 1

What is income elasticity?

Answer 1

% change in income

a measure of responsiveness in relation to changes in income and how this effects quantity demanded.

Question 2

What are normal goods?

Answer 2

It is a good that when income increases demand increases. Positive Income elasticity.

Question 3

What are inferior goods?

Answer 3

It is a good that when income increases demand decreases. Negative Income elasticity.

Question 4

What is cross-price elasticity of demand?

Answer 4

% change in price of good Y

A measure of responsiveness in relation to the change of demand for one product and subsequently the change in price of another.

Question 5

What are substitutes?

Answer 5

Is a good which can be replaced by another to satisfy this want.

It will have have a positive cross elasticity of demand with each other.

i. e coca-cola and pepsi cola
- Holiday in Spain vs Holiday on Turkey

Question 6

What are compliments

Answer 6

Is a good that is bought to satisfy a want.

It will have have a negative cross elasticity of demand with each other.

i.e tennis rackets and tennis balls.