income elasticity of demand

responsiveness of quantity demanded to a percentage change in the income of consumers

YED equation

(Qn - Qo) x Yo / (Yn - Yo) x Qo

What type of answer do you get for YED?

negative or positive

YED greater than zero

normal good

What are the two subsets of normal goods?

luxury and necessity

YED greater than 1

luxury (or superior good)

What is the one subset of luxuries?

Veblen goods (purchase more when price increases)

YED between 0 and 1

necessity

YED less than zero

inferior good

What is the one subset of inferior goods?

giffen goods (purchase more as price increases)

YED equals zero

consumer is satiated and doesn't need or desire more of the good

cross price elasticity of demand

measure of the response of quantity demanded of a good to a percentage change in the price of a related good

XED equation

(Q1n - Q1o) x P2o / (P2n - P2o) x Q1o

XED greater than 0

goods are substitutes

XED less than 0

goods are complements

XED equal to 0

goods are not related

price elasticity of supply

measure of a producer's response to a percentage change in the price recieved for a good/service

PES equation

(Sn - So) x Po / (Pn - Po) x So

PES greater than 1

price elastic

PES less than 1

price inelastic

PES equals 1

unitary price elasticity of supply

Does PES vary along supply curves?

no - all elastic, inelastic or unitary

perfect elasticity of supply

PES = undefined producers willing to produce unlimited supply of good as long as recieve certain price

perfect inelasticity of supply

PES = 0 producer can only supply a finite quantity regardless of price

Graphs for perfect cases of PES?

PES determinants: time period available for production

more time available gives producers more time to search for cheaper substitutes or alternative technology so PES more elastic

PES determinants: existence of spare capacity

factors of production not used most efficiently, easy for producers to increase output quickly so PES more elastic

PES determinants: availability of unsold stocks (inventory)

more goods can easily be supplied to market so PES more elastic

PES determinants: mobility of factors of production

more easily FofP can be moved from production of one good to another, more quickly quantity supplied can increase so PES more elastic

Why does PED change along a demand curve?