Price, income and cross elasticities of demand: key terms
15 terms. Say the definition out loud, tap to check, then say whether you knew it. Back to the topic
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Price elasticity of demand (PED)
The responsiveness of quantity demanded to a change in a good's own price, measured as the percentage change in quantity demanded divided by the percentage change in price.
Examiners say The two-step method is what scores: calculate both percentage changes first, then divide. Reports say the students who lost marks skipped straight to the division or forgot the minus sign.
Price inelastic demand
A PED between 0 and −1: quantity demanded changes by a smaller percentage than price, so a price rise increases total revenue.
Examiners say The petrol question (PED −0.2) was answered best by students who drew a steep demand curve and then talked about revenue; naming 'inelastic' alone earned one mark.
Price elastic demand
A PED more negative than −1: quantity demanded changes by a larger percentage than price, so a price cut increases total revenue.
Examiners say Say what it means for revenue, not just for quantity. 'Elastic so demand falls a lot' is description; the mark is for the revenue consequence.
Unitary elasticity
A PED of exactly −1: a change in price leaves total revenue unchanged because quantity changes by the same percentage.
Examiners say Rare as a direct question but a common end-point of 'explain how a firm could maximise revenue'.
Total revenue
Price multiplied by quantity sold. The direction it moves after a price change depends on PED.
Examiners say A mark was lost by a run of students for writing the revenue figure without its units ('million'). Write the full number with its unit.
Determinants of PED
Availability of close substitutes, proportion of income spent on the good, whether it is a necessity or a luxury, whether it is addictive or habit-forming, and the time period considered.
Examiners say The bus-ticket question asked for one reason for a difference in PED between two groups: the top answers picked one determinant and linked it to those particular consumers.
Income elasticity of demand (YED)
The responsiveness of demand to a change in consumers' real income, measured as the percentage change in quantity demanded divided by the percentage change in income.
Examiners say The sign tells you the type of good; the size tells you how much demand will swing in a recession or a boom. Both are needed for the 'significance to the producer' questions.
Normal good
A good with positive YED: demand rises as income rises. A luxury is a normal good with YED greater than +1; a necessity has YED between 0 and +1.
Examiners say Students could define normal and inferior goods but then failed to use the data to decide which the good was. Quote the figures and show the direction.
Inferior good
A good with negative YED: demand falls as income rises, because consumers switch to better alternatives.
Examiners say In the Freddo question many identified the chocolate bar as normal when the stem pointed to inferior. Read the extract for the clue before deciding.
Cross elasticity of demand (XED)
The responsiveness of demand for one good to a change in the price of another, measured as the percentage change in quantity demanded of good A divided by the percentage change in the price of good B.
Examiners say Half the marks in the gaming-machine question were for saying what a value of +1.28 means: the goods are substitutes and the response is more than proportionate.
Substitutes
Goods that can replace each other in consumption, so they have a positive XED: a rise in the price of one raises demand for the other.
Examiners say Give an example from the data when the question offers one; the four-mark substitutes-and-complements question rewarded examples as well as definitions.
Complements
Goods consumed together, so they have a negative XED: a rise in the price of one reduces demand for the other.
Examiners say The fish-and-chips calculation (XED −8) was mostly done correctly; errors came from applying the percentage to the wrong good's quantity.
Percentage change
The change divided by the original value, multiplied by 100. Every elasticity calculation begins with two of these.
Examiners say Dividing by the new value rather than the original is the commonest slip in the bank's elasticity calculations.
Elasticity and indirect tax incidence
The more price inelastic demand is, the larger the share of an indirect tax that falls on consumers rather than producers.
Examiners say This is the link that turns a Theme 1 definition into Level 3 analysis on tax questions: state it and then show it on the diagram.
Elasticity over time
Demand tends to become more price elastic in the long run because consumers have time to find substitutes and change habits.
Examiners say A ready-made evaluation point for any question about the effect of a price change or a tax.
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