Unit 10

Question 1

What is a complement good?

Give an example of complement goods?

Answer 1

A complement good is one that is purchased with other goods to satisfy a want. Complements have a negative cross elasticity of demand with each other.
E.g.
Strawberries and cream
Tennis racket and tennis ball

Question 2

Define cross-price elasticity of demand?

How is it measured?

Answer 2

Cross-price elasticity of demand is a measure of the responsiveness of the quantity demanded of one product to a change in the price of another product.
It is measured by dividing the percentage change in quantity demanded of one product by percentage change in price of the other product.

Question 3

Define income elasticity of demand.

How is it measured?

Answer 3

Income elasticity of demand is a measure of the responsiveness of the quantity demanded of a product to a change in income.
It is measured by dividing the percentage change in quantity demanded of the product by the percentage change in income.

Question 4

What is an inferior good?

Give an example.

Answer 4

An inferior good is one for which the demand of the good decreases when incomes rise.
E.g.
Bus travel
Instant coffee

Question 5

What is a normal good?

Give an example.

Answer 5

A normal good is one the demand for which increases when incomes rise.
E.g.
Holidays
Expensive brand cars

Question 6

What is a substitute good?

Answer 6

A substitute good is one which can be replaced by another to satisfy a want. Substitutes have a positive cross-price elasticity of demand with each other.