Ch 4 - Elasticity Of Demand

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