Summary
Price, income, and cross-elasticities of demand measure how the quantity demanded of a good responds to changes in price, income, and the price of other goods, respectively.
- Price Elasticity of Demand (PED) — measures the responsiveness of quantity demanded to a change in price. Example: If the price of a product increases, and the demand decreases significantly, the product is price elastic.
- Income Elasticity of Demand (YED) — measures the responsiveness of quantity demanded to a change in consumer income. Example: If consumer income rises and the demand for luxury cars increases, these cars have a positive YED.
- Cross Elasticity of Demand (XED) — measures the responsiveness of quantity demanded for one good to a change in the price of another good. Example: If the price of coffee increases and the demand for tea increases, they are substitute goods with a positive XED.
Exam Tips
Key Definitions to Remember
- Price Elasticity of Demand (PED)
- Income Elasticity of Demand (YED)
- Cross Elasticity of Demand (XED)
Common Confusions
- Confusing inelastic demand with elastic demand
- Misinterpreting the signs of YED and XED
Typical Exam Questions
- What is price elasticity of demand? It measures how much the quantity demanded of a good responds to a change in its price.
- How does income elasticity of demand affect normal and inferior goods? Normal goods have a positive YED, while inferior goods have a negative YED.
- What does a positive cross elasticity of demand indicate? It indicates that the goods are substitutes.
What Examiners Usually Test
- Ability to calculate and interpret elasticity values
- Understanding the relationship between elasticity and total revenue
- Application of elasticity concepts to real-world scenarios