3.1.2.2 price income cross elasticity of demand

Question 1

what is price elasticity of demand

Answer 1

how the quantity demanded responds to a change in its price

Question 2

what is the formula for PED

Answer 2

%change in QD/ %change in price

Question 3

price elastic

Answer 3

when a change in product price has a large affect on demand

Question 4

price inelastic

Answer 4

when a change in price has a proportionally smaller affect on demand

Question 5

is a price inelastic graph steep or flat? why?

Answer 5

steep, because as rise in price will have a small affect on QD

Question 6

PED>1

Answer 6

price elastic

Question 7

PED<1

Answer 7

price inelastic

Question 8

income elasticity

Answer 8

the affect on demand when incomes changes

Question 9

what is the formula for YED (income)

Answer 9

%change in QD/ %change in real income

Question 10

inferior good

Answer 10

a good which experiences a decrease in demand when income rises, and vise versa

Question 11

normal good

Answer 11

a good which experiences an increase in demand when income rises

Question 12

what does a perfectly elastic graph look like

Answer 12

a straight horizontal line

Question 13

what does a pefectly inelastic graph look like

Answer 13

a straight vertical line

Question 14

0<YED<1 (positive YED)

Answer 14

normal good

Question 15

YED>1

Answer 15

luxury good

Question 16

YED<0 (negative YED)

Answer 16

inferior good

Question 17

cross elasticity

Answer 17

the affect a change in the price on one good has on the demand of another good

Question 18

what is the formula for XED (cross)

Answer 18

XED=%change in QD of good x/ %change in price of good y

Question 19

substitute

Answer 19

a similar rival product which can be purchased instead, often the cheaper option

Question 20

complements

Answer 20

a good which is used with another good

Question 21

what happens to a product if a substitute increases in price

Answer 21

demand for your product will increase

Question 22

XED>0

Answer 22

substitute good

Question 23

XED=0

Answer 23

two goods are independent and have no effect on the other

Question 24

XED<0

Answer 24

complement good

Question 25

true of false, the closer the substitutes the higher the XED

Answer 25

true

Question 26

what factors affect PED

Answer 26

-availability of substitutes
-degree of necessity
-% of income spent on the good
-brand loyalty

Question 27

what is the relationship between PED and total revenue

Answer 27

-if a product is price elastic then its price has a negative relationship with revenue
-if a product is price inelastic then its price has a positive relationship with revenue

Question 28

if a price elastic product increases its price what will happen to revenue

Answer 28

it will decrease, because the price change will have a large effect on demand

Question 29

if a price inelastic product increases in price what will happen to revenue

Answer 29

it will increase

Question 30

how can a firm use knowledge of of price elasticity of demand to maximize revenue

Answer 30

if a firm has a product with PED<1 (inelastic) then an increase in price would have a small effect on demand, meaning the price increase would lead to a greater total revenue.