Booklet 1 - rational behaviour, PED, YED , XED

objectives of economic agents

households - maximise utility

firms - profit maximisation

government - GOV OBJECTIVES (macro)

what factors effect the demand curve (mnemonic)

PITAPOP

• price of other goods

• income changes

• tastes, fashion

• advertising/ branding

• population changes

intest rates + time period

PED values

demand perfectly price inelastic PED = 0

demand is price inelastic PED 0>x>-1

demand is unit price elastic PED = -1

demand is price elastic PED < -1

demand is perfectly price elastic PED = infinite

draw : relatively price elastic, inelastic, perfectly inelastic, perfectly elastic + unitary elastic

what factors effect PED

• availability of close substitutes

• nature of product - addictive, necessity, luxury

• proportion of income spent

• durability of the product

• time period

YED values

demand is income elastic inferior good YED > -1

demand is income inelastic inferior good YED = 0<x<-1

no relationship YED = 0

demand is income inelastic normal good YED = 0>x>1

demand is income elastic normal good YED > 1

what factors effect YED

• recessions

• economic growth

• government policies - minimum wage, legislation, taxation

• nature of the good ( luxury, necessity, superior goods ect)

XED values

strong complement XED < -1

weak compliment XED -1<x<0

unrelated XED = 0

weak substitute XED 0<x<1

strong substitute XED XED < 1

what factors effect XED

availability of substitutes and compiments

proportion of income spent