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32 Terms
Price Elasticity of Demand (PED)
PED put simply…
percentage change in quantity demanded ÷ percentage change in price
What does the PED number mean?
A 1% change in price leads to approximately a ____% change in demand
A negative PED means…
Price and quantity demanded move in the opposite direction
The price elasticity of demand is always ____
Negative
PED > 1
Elastic demand
Consumers are highly sensitive to price changes
PED = 1
Unitary elastic demand
The price change and the consumer response are proportional
PED < 1
Inelastic demand
Consumers are not sensitive to price changes
Income Elasticity of Demand (YED)
YED put simply…
percentage change in quantity demanded ÷ percentage change in income
What does the YED number mean?
For every 1% change in income, quantity demanded changes by approximately ___%
A positive YED means…
income and quantity demanded move in the same direction
A negative YED means…
income and quantity demanded move in the opposite direction
YED < 0
Inferior Good
0 < YED < 1
Necessity
YED＞1
Luxury
Cross-Price Elasticity of Demand (XED)
XED put simply…
percentage change in quantity demanded of one good ÷ percentage change in price of a related good
What does the XED number mean?
For every 1% change in the price of Good B, the quantity demanded of Good A changes by approximately ___%
A positive XED means…
The price of one good and the demand for the other move in the same direction
A negative XED means…
The price of one good and the demand for the other move in the opposite direction
XED＞0
Substitutes
XED = 0
No relationship
XED < 0
Complements
Price Elasticity of Supply (PES)
PES put simply…
percentage change in quantity supplied of X ÷ percentage change in price of X
What does the PES number mean?
For every 1% change in price, the quantity supplied changes by approximately ___%
A negative PES means…
Price and quantity supplied move in opposite directions
A positive PES means…
Price and quantity supplied move in the same direction
PES ＞1
Elastic supply
Quantity supplied changes by a larger percentage than price
PES = 1
Unitary elastic supply
Quantity supplied changes proportional to price
PES < 1
Inelastic supply
Quantity supplied changes by a smaller percentage than price