1.2.3 Price, income and cross elasticity of demand

Define PED

A measure of responsiveness for quantity demand after a price change

What is the formal for PED

What does a PED of 0 mean

Perfectly inelastic demand. A change in price leads to no change in demand.

What does PED between between 0 and -1 mean

Price inelastic demand. A change in price leads to a proportionally smaller change in demand

What does a PED on -1 mean

Unitary elasticity of demand. A change in price leads to proportional change in demand. this also means a change in price doesn’t lead to a fall in revenue.

What does a ped of between -1 and infinity mean

Price elastic demand. A change in price leads to a proportionally larger change in demand.

What does a PED of infinity mean

Perfectly elastic demand. A change in price leads to an infinite change in supply. A change in price causes revenue to fall to zero.

What factors influence the PED of a good or service

PLANTS

Proportion of income-The higher the prop proportion of income a good or service take up the more elastic it will be.

Loyalty-The stronger loyalty the more inelastic good will be.

Addictiveness-The goods that are more addictive or habitual are more inelastic.

Necessities- Necessities are more inelastic

Time- The longer since a price rise the more elastic

Substitutes-The stronger the substitutes the more elastic.

Define income elasticity of demand

The responsiveness of demand to a change in income.

What is the formula for income elasticity of demand

What YED values would normal goods have

Positive as when income rise demand rises as well

What YED values would inferior goods have

Negative as when income rise demand falls

What YED values do necessities have

Values between 0-1 as they are more inelastic

What YED values do luxuries have

Values greater than 1 as they are more elastic

What does the relationship between income and quantity demanded for a normal good

What does the relationship between income and quantity demanded for an inferior good

Define cross elasticity of demand

The responsiveness of demand for one product to a change in the price of another product

What is the formula for cross elasticity of demand

XED=

What XED values do substitute goods have

Positive as the price of one good rise the demand for the substitute good increases

What XED values do complementary goods have

Negative as the price of one good rise demand for the complementary good falls