Micro 6 - Income Elasticity of Demand and Cross Elasticity of Demand

Question 1

Define Income Elasticity of Demand

Answer 1

Income Elasticity of Demand measures how much the demand for a good changes with a change in real income

Question 2

What is the abbreviation for Income Elasticity of Demand?

Answer 2

YED

Question 3

What is the formula for calculating Income Elasticity of Demand?

Answer 3

Percentage change in quantity demanded of a good / Percentage change in real income

Question 4

Is YED a percentage?

Answer 4

No

Question 5

What are the 3 different categories that YED can be?

Answer 5

• Elastic
• Inelastic
• Perfectly inelastic

Question 6

What does the YED value have to be for a product to have income elastic demand?

Answer 6

Greater than 1

Question 7

What does a YED value of greater than 1 mean for a product?

Answer 7

It has income elastic demand

Question 8

What does the YED value have to be for a product to have income inelastic demand?

Answer 8

Less than 1

Question 9

What does a YED value of less than 1 mean for a product?

Answer 9

It has income inelastic demand

Question 10

What does the YED value have to be for a product to have perfectly income inelastic demand?

Answer 10

0

Question 11

What does a YED value of 0 mean for a product?

Answer 11

It has perfectly income inelastic demand

Question 12

What does a YED value of 5.4 mean?

Answer 12

For every 1% increase in incomes, demand increases by 5.4%

Question 13

What does it mean for a product to have perfectly income inelastic demand?

Answer 13

No matter how high incomes rise, demand remains constant

Question 14

Define Cross Elasticity of Demand

Answer 14

Cross Elasticity of Demand is a measure of how the quantity demanded of one good responds to a change in the price of another good

Question 15

What abbreviation is used to describe Cross Elasticity of Demand?

Answer 15

XED

Question 16

What is the formula for calculating Cross Elasticity of Demand?

Answer 16

Percentage change in quantity demanded of good A / Percentage change in price of good B

Question 17

If two goods are substitutes will their XED be positive or negative?

Answer 17

Positive

Question 18

If two goods are complementary will their XED be positive or negative?

Answer 18

Negative

Question 19

Do Normal goods have a positive or negative YED sign?

Answer 19

Positive

Question 20

What type of good will a normal good be with a YED figure between 0 and 1?

Answer 20

A Necessity

Question 21

What effect does rising incomes have on the demand for normal goods?

Answer 21

It causes demand to increase

Question 22

What type of good will a normal good be with a YED figure of greater than 1?

Answer 22

A Luxury good

Question 23

Define a Necessity good in terms of YED

Answer 23

A Necessity good is a good for which the income elasticity of demand is positive and between 0 and 1

Question 24

Define a luxury good in terms of YED

Answer 24

A good for which the income elasticity of demand is positive and greater than 1

Question 25

What are normal goods?

Answer 25

Normal goods are those which people will demand more of if their real income increases.

Question 26

What are inferior goods?

Answer 26

Inferior goods are those which people demand less of if their real income increases.

Question 27

Do inferior goods have a positive or negative YED sign?

Answer 27

Negative

Question 28

What will the YED figure be for an inferior good?

Answer 28

Less than 0

Question 29

Define inferior goods in terms of YED

Answer 29

Inferior goods have a YED figure which is negative and less than 0

Question 30

What effect will a rise in income have on an inferior good?

Answer 30

A rise in income will lead to the inferior good being replaced with one considered to be of higher quality

Question 31

Do substitute goods have positive or negative XEDS

Answer 31

Positive

Question 32

Explain substitute goods in terms of XED

Answer 32

A fall in the price of one substitute will reduce the demand for another. The closer the substitutes, the higher the positive XED

Question 33

What XED figure indicates a strong relationship between two products?

Answer 33

An XED figure greater than 1

Question 34

What XED figure indicates a weak relationship between two products?

Answer 34

An XED figure of less than 1

Question 35

Will complementary goods have a positive or negative XED sign?

Answer 35

Negative

Question 36

Explain complementary goods in terms of XED

Answer 36

An increase in the price of a good will lead to a reduction in demand for its complements

Question 37

What does it mean if a good has an XED of 0?

Answer 37

Goods which have an XED of 0 are independent or unrelated and don't directly affect the demand of each other

Question 38

How can information about YED be used by firms and governments?

Answer 38

- Sales forecasting - Pricing Policy - Supplying a range of goods with various YEDs

Question 39

How can information about YED be used in sales forecasting?

Answer 39

If the YED of a product and likely changes in income are known then sales levels can be predicted

Question 40

How can information about YED be used in pricing policy?

Answer 40

A reduction in price for a normal good when there is an expected fall in incomes may limit the expected reduction in demand for the good

Question 41

Why might a firm choose to supply a range of goods with various YEDs?

Answer 41

During a boom demand for a product with a high YED will increase but demand for that product will decrease when the economy is in a recession. So a firm may also supply products with a low YED so that they can still earn revenue during a recession

Question 42

How might firms and governments use knowledge of XEDs for their goods?

Answer 42

It's useful for firms to know the XEDs of their goods because that will tell them how to react to changes in the price of related products to ensure they maximise demand for their products