4.1 - 3.2 Price, income and cross elasticities of demand Flashcards
What is elasticity?
A measure of how much buyers and sellers respond to changes in market conditions.
What is Price Elasticity Demand (PED)?
The percentage of change in quantity demanded given a percentage change in the price.
PED equation?
PED= Percentage change in Q/Percentage change in price
Percentage change equation?
(FV-IV/IV) x 100
Inelastic Demand?
The price increases and more is gained than lost in terms of quantity.
Elastic Demand?
The price increases and more is lost than gained in terms of quantity.
Unitary elastic PED?
PED = 1, quantity demanded changes by exactly the same percentage as price.
Relatively elastic PED?
PED>1, quantity demanded changes by a larger percentage than the price. Curve is sloped.
Relatively inelastic PED?
PED<1, quantity demanded changes by a smaller percentage than the price. Curve is steep.
Income Elasticity of Demand (YED)?
Measures the relationship between a change in income and the resulting change in demand.
Luxury goods
Anything we want that isn’t essential to life.
Normal goods
Anything we need that is essential to life and bought by those with reasonable income.
Inferior goods
Anything that is made considerably cheaper for those with less income to buy.
Total Revenue equation
Total Revenue = price x quantity
Cross price elasticity of demand (XED)?
Looks at the impact a change in the price of one good has on the demand on another good.
