Ch 4 - Elasticity Of Demand

Inferior goods

Inferior goods

________: as income rises, demand falls (consumers look for more affordable substitutes)

Increase income

________ leads to fall in demand.

Engel curve

A(n) ________ shows the relationship between demand for a good (x- axis) and income level (y- axis)

PES

________ price elasticity of supply: a measure of how much the quantity supplied of a product changes when there's a change in its price.

Price elasticity of demand

measure of the responsiveness of quantity demanded to a price change

Between 0 and 1

price inelastic demand

Inelastic demand curve

When a product’s PED is inelastic and the price falls, the firm will face loss in revenue

Elastic demand curve

When the selling price of a product that has an elastic PED is decreased, the revenue increases (they sell more)

The PED (price of elasticity of demand) will reduce as the price falls

Demand becomes less elastic

Determinants of PED

• Availability of substitutes (too many choices)

• Time

• Luxury

• Proportion of income is spent on a good

Income elasticity of demand

measures the extent to which the quantity demanded of a product is affected by an income

Inferior goods

as income rises, demand falls (consumers look for more affordable substitutes)

Normal goods YED > 0

• Increased income = higher demand

• Positive elasticity

Luxury goods YED > 1

• Increased income

• Bigger % increase in demand

Inferior goods YED < 0

• Increase income leads to fall in demand

• Negative elasticity

Cross elasticity of demand (XED)

measure of how much the demand of a product changes when there's a change in the price of another product

% △in quantity

XED= ________ demanded of X /% △ in price of product Y.

Price elasticity of demand

measure of the responsiveness of quantity demanded to a price change

Income elasticity of demand

measures the extent to which the quantity demanded of a product is affected by an income

Inferior goods

as income rises, demand falls (consumers look for more affordable substitutes)

Unitary IED

perfectly proportional, Ey = 1

Zero income IED

consumers income doesnt affect demand on product, Ey = 0

Positive slope

normal good

Negative slope

inferior good

PES price elasticity of supply

a measure of how much the quantity supplied of a product changes when there's a change in its price

Cross elasticity of demand (XED)

measure of how much the demand of a product changes when there's a change in the price of another product