Elasticity Of Demand

Question 1

What is cross price elasticity of demand?

Answer 1

XPED - measures the responsiveness of demand of one product, following change in price of another

Question 2

How is XPED impacted by substitutes?

Answer 2

If the price of one rises, demand increases for rival product —> positive cross price elasticity

Question 3

How does complementary product impact XPED?

Answer 3

Price of one good decreases, demand for associated product increases, as goods are brought together —> negative cross price elasticity

Question 4

What’s the equation for XPED?

Answer 4

%change Quantity Demanded for Good X
Divided by
%change of price for Good Y

Question 5

What does it mean if the answer to the XPED equation is a +?

Answer 5

They are substitute goods
—> the higher the + answer, the closer the substitutes are

Question 6

What does it mean if the answer to the XPED equation is a -?

Answer 6

The goods are complements
- the further away the - is from 0, the closer the complements are

Question 7

What does the answer 0 mean from the XPED equation?

Answer 7

No relationship

Question 8

How is XPED important?

Answer 8

Its important for businesses to estimate the impact of a rivals pricing strategy on the demand for their own products

Question 9

What does price elasticity of demand mean?

Answer 9

PED- shows the responsiveness to demand to changes in price

Question 10

How is demand elastic in PED?

Answer 10

If prices rise and demand falls a lot, demand is very responsive to changes in price

Question 11

What is Inelastic demand in PED?

Answer 11

If demand hasn’t changed much to an increase in price, it means demand isn’t very responsive

Question 12

What makes a product elastic or Inelastic?

Answer 12

• if it’s essential - demand wont be very responsive
• if its addictive - demand won’t be very responsive
• if its a big part of your income - more responsive to bigger prices (e.g. chewing gum increasing by 10p won’t matter as much as a TV increasing by £500)
• if it has a lot of substitutes - demand will be very responsive to changes in price

Question 13

What is income elasticity of demand?

Answer 13

YED - measures the responsiveness of demand following change in income

Question 14

What happens to demand for normal goods in YED?

Answer 14

For normal goods, as income increases, demand will increase

Question 15

what happens to demand for inferior goods in YED?

Answer 15

For inferior goods, as income increases, demand decreases —> consumers choose alternative products perceived to be higher quality

Question 16

What is the equation for YED?

Answer 16

%change in Quantity demanded
Divided by
%change in Income

Question 17

What does it mean if the answer to the YED equation is a +?

Answer 17

It is a normal good

Question 18

What does it mean if the answer to the YED equation is a -?

Answer 18

It is an inferior good

Question 19

What are inferior goods?

Answer 19

These are basic products (e.g. shop brands, tins, cheap essentials, etc)

Question 20

What are normal goods?

Answer 20

Can be either:
- basic goods - YED between 0-1
- luxury goods - YED more than 1