Inequalitites

Elasticity

A measure of the responsiveness of an economic variable (such as the quantity demanded of a good or service) to a change in another economic variable (such as its price or income).

Luxury goods

Goods that are not considered essential by consumers therefore they have a price elastic demand (PED > 1), or income elastic demand (YED > 1).

Necessity

The degree to which a good is necessary or essential. If the increase in quantity demanded for a necessity good is less than proportional to the rise in income; then the demand for the necessity good is income elastic. If the change in quantity demanded for a necessity good is less than proportional to a change in price; then the demand for the necessity good is price inelastic.

Perfectly elastic demand

Occurs along a horizontal demand curve signifying that any quantity can be bought at only one particular price. (PED is infinite.) Buyers are only able and willing to buy at that particular price.

Perfectly inelastic demand

Where a change in the price of a good or service leads to no change in the quantity demanded of the good or service. (PED is equal to zero.) This is illustrated along a vertical demand curve.

(Price) elastic demand

Where a change in the price of a good or service leads to a proportionately larger change in the quantity demanded of the good or service in the opposite direction. PED is greater than one: % change of price < % change of quantity demanded

Price elasticity of demand (PED)

A measure of the responsiveness of the quantity demanded of a good or service to a 1% change in its price.

(Price) inelastic demand

Where a change in the price of a good or service leads to a proportionately smaller change in the quantity demanded of the good or service in the opposite direction. PED is less than one and % change of price > % change of quantity demanded

Revenues

Payments received by firms when they sell their output. Price per unit x quantity (sold)

Substitutes

Goods that can be used in place of each other, as they satisfy a similar need. When the

Engel curve

A curve showing the relationship between consumers' income and quantity demanded of a good. It indicates whether a good is normal or inferior.

Income elasticity of demand (YED)

The responsiveness of demand for a good or service to a change in income.

Normal goods

A good where the demand for it increases as income increases.

Inferior goods

Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases.

Real income

The total value of all final goods and services produced in an economy in a given time period, usually one year, adjusted for inflation.

Income

A flow of earnings from using factors of production to produce goods and services. Wages and salaries are the factor reward to labour and interest is the flow of income for the ownership of capital.