XED and YED Recap

Question 1

YED

Answer 1

Income elasticity of demand is how responsive demand is to a change in income. % change in quantity demanded/ % change in income

Question 2

Types of goods = YED

Answer 2

YED<0 =Inferior good-demand decreases when incomes rise
YED=0 =Inelastic-Demand is not related to income
0<YED<1=Basic normal good-Demand for basic normal goods increase when incomes rise
YED>1=Superior normal good-Superior goods demand increases proportionately more than basic goods.

Question 3

Uses of YED in a firm

Answer 3

It can be helpful in planning strategies in increasing sales and revenue. A firm could plan to sell a portfolio of products with different YED’s so that whatever stage the business cycle is in, the firms have some products in demand.

Question 4

XED

Answer 4

Cross elasticity of demand is how responsive demand of good A is to a change in price of good B. Tells us if goods are substitutes, complements or unrelated. % change in quantity demanded/% change in price.

Question 5

Types of goods=XED

Answer 5

Positive=Substitute good-An increase in the price of one good increased the demand of the substitute good.
Close to or 0= Inelastic-No significant link between goods
Negative=Complements-An increase in the price of one good decreases the demand of the complementary good.

Question 7

Inelastic vs negative elasticity

Answer 7

Inelastic means that demand doesn’t change much at all; when a value is close to 0. Negative elasticity means that when one value increases, the other value decreases.