AQA Economics A-level Microeconomics: Price, Income, and Cross Elasticities of Demand

Vocabulary flashcards covering price, income, and cross elasticities of demand based on AQA Economics A-level Microeconomics Topic 3.2.

Price elasticity of demand

The responsiveness of a change in demand to a change in price.

Price elastic good

A good where the change in price leads to an even bigger change in demand, resulting in a numerical value for PED $> 1$.

Price inelastic good

A good that has a demand that is relatively unresponsive to a change in price, resulting in a PED $< 1$.

Unitary elastic good

A good that has a change in demand which is equal to the change in price, resulting in a PED $= 1$.

Perfectly inelastic good

A good that has a demand which does not change when price changes, resulting in a PED $= 0$.

Perfectly elastic good

A good that has a demand which falls to zero when price changes, resulting in a PED $= \infty$.

Necessity

A good such as bread or electricity that has a relatively inelastic demand because consumers still require it even if prices increase significantly.

Luxury goods (Price Elasticity)

Goods such as holidays that are more elastic; if the price increases, demand is likely to fall significantly.

Elasticity in the Short Run

A period where consumers do not have the time to find substitutes, making demand more inelastic.

Elasticity in the Long Run

A period where consumers have time to respond and find a substitute, making demand more price elastic.

Habitual consumption

The demand for goods such as cigarettes that is not sensitive to a change in price because consumers become addicted to them.

Durability

A factor where a good that lasts a long time, such as a washing machine, has a more elastic demand because consumers can wait to buy another one.

Peak demand

Times such as 9am and 5pm for trains when the demand for tickets is more price inelastic.

Indirect tax burden (Inelastic Demand)

When a firm sells a good with inelastic demand, they are likely to put most of the tax burden on the consumer as price increases will not cause demand to fall significantly.

Indirect tax burden (Elastic Demand)

When a firm sells a good with elastic demand, they are likely to take most of the tax burden upon themselves to prevent a significant fall in demand and revenue.

Subsidy

A payment from the government to firms to encourage the production of a good and to lower their average costs.

Total revenue (TR)

The average price times the quantity sold, calculated by the formula $TR = P \times Q$.

Income elasticity of demand (YED)

The responsiveness of a change in demand to a change in income.

Inferior goods

Goods which see a fall in demand as income increases, where $YED < 0$.

Normal goods

Goods where demand increases as income increases, where $YED > 0$.

Luxury goods (Income Elasticity)

Normal goods where an increase in income causes an even bigger increase in demand, where $YED > 1$.

Cross elasticity of demand (XED)

The responsiveness of a change in demand of one good, X, to a change in price of another good, Y.

Complementary goods

Goods that have a negative XED; if one good becomes more expensive, the quantity demanded for both goods will fall.

Close complements

Goods where a small fall in the price of good X leads to a large increase in the quantity demanded of Y.

Weak complements

Goods where a large fall in the price of good X leads to only a small increase in the quantity demanded of Y.

Substitutes (XED)

Goods that can replace one another, resulting in a positive XED and an upward sloping demand curve.

Close substitutes

Goods where a small increase in the price of good X leads to a large increase in the quantity demanded of Y.

Weak substitutes

Goods where a large increase in the price of good X leads to a smaller increase in the quantity demanded of Y.

Unrelated goods

Goods that have a XED equal to zero, meaning the price change of one has no effect on the demand for the other.