# Price, Income and Cross Elasticities of Demand Flashcards Preview

## AQA AS Micro-Economics > Price, Income and Cross Elasticities of Demand > Flashcards

Flashcards in Price, Income and Cross Elasticities of Demand Deck (17)
1
Q

Complements

A

Two complements are said to be in joint demand. Examples include fish and chips, iron ore and steel, hardware and software for digital products.

2
Q

Cross price elasticity of demand

A

Responsiveness of demand for good X following a change in the price of good Y (a related good). With cross price elasticity, we make an important distinction between substitute products and complementary goods and services.

3
Q

Derived demand

A

Derived demand is demand that comes from (is derived) from the demand for something else. Thus, the demand for machinery is derived from the demand for consumer goods that the machinery can make. If there is low demand for consumer
goods, there is low demand for the machinery that can make them. Demand for bricks is derived from spending on new construction projects.

4
Q

Elastic Demand

A

Demand for which the coefficient of price elasticity of demand is greater than 1.

5
Q

Income elasticity of demand

A

Measures the relationship between a change in quantity demanded and a change in real income. The formula for income elasticity is: percentage change in quantity demanded divided by the percentage change in income.

6
Q

Inelastic demand

A

When the coefficient of price elasticity of demand is less than 1. (Ped<1)

7
Q

Inferior good

A

When demand for a product falls as real incomes increases. Income elasticity is negative.

8
Q

Luxury good

A

Luxury goods and services have an income elasticity of demand with a coefficient of more than +1 i.e. a 5% rise in real incomes might lead to an increase in demand of 20% giving a coefficient of YED of +4.

9
Q

Necessities

A

Necessities typically have a low own-price elasticity of demand (consumers are not sensitive to a change in price) and a low but positive income elasticity of demand (YED >0 but

10
Q

Normal goods

A

Normal goods have a positive income elasticity of demand. Necessities have a coefficient of income elasticity of demand of between 0 and +1. Luxuries have income elasticity > +1 demand rises more than proportionate to a change in income.

11
Q

Price elasticity of demand

A

Price elasticity of demand measures the responsiveness or sensitivity of demand for a product following a change in its own price.

12
Q

Real income

A

The money earned from employment after the distorting effects of inflation have been removed.

13
Q

Substitutes

A

Goods in competitive demand that act as replacements for another product.

14
Q

Total revenue

A

The amount of money earned by a firm from selling its output.

15
Q

Total revenue formula

A

TR = P X Q

16
Q

Unit elasticity of demand

A

A demand curve with unitary price elasticity has a coefficient of PED equal to 1 (unity) throughout. Total spending on the product will be the same at each price level. Government intervention will not affect total spending on the product.

17
Q

Unrelated goods

A

Goods or services that have no relationship between them in which case the crossprice elasticity of demand will be zero.