Theme 1: Elasticities

Question 1

Price elasticity of demand (PED)?

Answer 1

PED measures how much quantity demanded changes in response to a change in price

PED = %△Qd/ %△P

Question 2

Elastic demand?

Answer 2

When PED is between -1 and -∞. Demand is very responsive to changes in price.

Question 3

Inelastic demand?

Answer 3

Between -1 and 0

Not very responsive to change in price

Question 4

Income elasticity of demand (YED)

Answer 4

% change in demand for good/%change in income

Question 5

Normal goods

Answer 5

demand increases when income increase, which means the YED for normal goods is positive

Question 6

Inferior goods

Answer 6

For inferior goods (e.g. Sainsbury’s basics ice cream), demand increases when income decreases, which means the YED for inferior goods is negative

Question 7

Income elastic goods (or luxury goods)?

Answer 7

When YED is between 1 and ∞. Income elastic goods are very responsive to changes in income and are likely to be luxury goods e.g. a rolex

Question 8

Income inelastic goods (or necessity goods)?

Answer 8

When YED is between 0 and 1. Income inelastic goods are unresponsive to changes in income, and are likely to be necessity goods e.g. bread

Question 9

Cross elasticity of demand (XED)?

Answer 9

XED measures how much quantity demanded of good A changes in response to a change in price of good B

XED = %△Qd of A/%△ of B

Question 10

Complements (or complementary goods)?

Answer 10

Complements are goods which are used and bought together (e.g. iPhones and iPhone apps)

For complements, if the price of good B (iPhone apps) increases then demand for good A (iPhones) decreases.

XED will be negative.

Question 11

Substitutes (or substitute goods)?

Answer 11

Substitutes are goods which can replace one another (e.g. iPhones and Samsungs)

For substitutes, if the price of good B (Samsungs) increases then demand for good A (iPhones) increases.

XED will be positive.

Question 12

Unrelated goods?

Answer 12

XED = 0 for unrelated goods