CIE AS Economics Elasticities of Demand

9708

What does PED stand for?

price elasticity of demand

What does YED stand for?

income elasticity of demand

What does XED stand for?

cross elasticity of demand

PED formula

% change in qd / % change in price

YED formula

% change in qd / % change in consumer income

XED formula

% change in the quantity demanded of good x / % change in the price of good y

When would YED be positive and when would it be negative when consumer incomes rise?

YED will be positive when consumer incomes rise for normal goods and YED will be negative when consumer incomes rise for inferior goods

YED < -1

elastic inferior good

-1 ≤ YED < 0

inelastic inferior good

YED = 0

no relationship between income and quantity demanded; perfectly income inelastic

Cross elasticity of demand definition

a measure of the sensitivity of quantity demanded of a good or service to a change in the price of some other good or service

Which goods have a positive XED value?

substitutes - an increase in the price of one good leads to an increase in quantity demanded of the other

Which goods have a negative XED value?

complements - an increase in the price of one good leads to a fall in the quantity demanded of the other

XED < -1

elastic complement

-1 ≤ XED < 0

inelastic complement

XED = 0

no relationship between the two goods, perfectly cross inelastic

0 < XED ≤ 1

inelastic substitute

XED > 1

elastic substitute

Determinants of XED (2)

whether relationship is between substitutes or complements determines the XED sign;
whether the goods have a strong or weak relationship (the stronger the relationship, the higher the coefficient), or whether they do not have any relationship at all

Determinants of YED (4)

proportion of income spent on the good;
definition of the product, determines whether goods are considered normal or inferior;
economic development of a particular economy, effects whether goods are interpreted as normal or inferior;
whether the good is perceived as a necessity

Determinants of PED (4)

availability of substitutes;
whether the good is a necessity;
proportion of income spent on good;
time period under consideration - the elasticity of demand tends to be more elastic in the long run than in the short run

At what point on a straight line demand curve (other than perfectly inelastic and perfectly elastic curves) is total revenue the highest?

at the midpoint of the demand curve where there is unitary elasticity

What is the variation in price elasticity of demand along the length of a straight-line demand curve?

from the far left until the midpoint, demand is price elastic;
at the midpoint, demand is unit elastic;
from the midpoint until the far right, demand is price inelastic

Why is there variation in price elasticity of demand along the length of a straight-line demand curve?

price elasticity of demand is defined in terms of percentage changes so at a relatively high price, a change in x dollars is a smaller percentage change (higher PED, elastic) than a change in x dollars at a relatively lower price (lower PED, inelastic)

Perfectly inelastic

0

Inelastic

0 < x < 1

Unitary elasticity or Unit elastic

1

Elastic

1 < x < infinity

Perfectly elastic

infinity

Relationship between price elasticity of demand and total expenditure/revenue

when demand is price elastic, total expenditure/revenue rises as price falls;
when demand is price inelastic, total expenditure/revenue falls as price falls;
as you move down a straight-line demand curve, total expenditure/revenue first increases until its midpoint and then decreases