Ch 4 - Elasticity Of Demand
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Last updated 7:39 PM on 12/31/22
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26 Terms
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Inferior goods
________: as income rises, demand falls (consumers look for more affordable substitutes)
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Increase income
________ leads to fall in demand.
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Engel curve
A(n) ________ shows the relationship between demand for a good (x- axis) and income level (y- axis)
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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.
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**Price elasticity of demand**
measure of the responsiveness of quantity demanded to a price change
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**Between 0 and 1**
price inelastic demand
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Inelastic demand curve
When a product’s PED is inelastic and the price falls, the firm will face loss in revenue
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Elastic demand curve
When the selling price of a product that has an elastic PED is decreased, the revenue increases (they sell more)
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The **PED (price of elasticity of demand**) will reduce as the price falls
\
\
Demand becomes less elastic
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**Determinants of PED**
* Availability of substitutes (too many choices)
* Time
* Luxury
* Proportion of income is spent on a good
* Time
* Luxury
* Proportion of income is spent on a good
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**Income elasticity of demand**
measures the extent to which the quantity demanded of a product is affected by an income
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**Inferior goods**
as income rises, demand falls (consumers look for more affordable substitutes)
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**Normal goods YED > 0**
* Increased income = higher demand
* Positive elasticity
* Positive elasticity
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**Luxury goods YED > 1**
* Increased income
* Bigger % increase in demand
* Bigger % increase in demand
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**Inferior goods YED < 0**
* Increase income leads to fall in demand
* Negative elasticity
* Negative elasticity
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**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
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% △in quantity
XED= ________ demanded of X /% △ in price of product Y.
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Price elasticity of demand
measure of the responsiveness of quantity demanded to a price change
19
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Income elasticity of demand
measures the extent to which the quantity demanded of a product is affected by an income
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Inferior goods
as income rises, demand falls (consumers look for more affordable substitutes)
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Unitary IED
perfectly proportional, Ey = 1
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Zero income IED
consumers income doesnt affect demand on product, Ey = 0
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Positive slope
normal good
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Negative slope
inferior good
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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
26
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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
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