LS15-LS16 Booklet

• XED - cross price elasticity of demand
• XED = percentage change in quantity demanded of good A/ percentage change in the price of good B
• XED measures the responsiveness of demand for one good, to the changes in the price of another good
• substitute goods have a positive XED
• complement goods have a negative XED
• the XED of unrelated goods is 0
• the XED of two products which are close substitutes for each other will be high and positive
• ”what is the XED for good Y with respect to good X”


  the percentage change of quantity demanded for Y over the percentage change of price for X
• fill in gaps

  A) Consumer surplus

  B) Producer surplus

  
• YED - income elasticity of demand
• Income elasticity of demand measures the responsiveness of demand to changed in income
• inferior goods have a negative YED because when income rises, demand falls
• normal goods have a positive YED because when income rises, consumers will remain to buy that product
• functions of price mechanism:

  signalling, incentive, rationing
• Signalling function: Changed in price provide information to both consumers and producers about changes in market. Acts as a signal to producers so that they produce more to keep up with demand
• incentive function:

  producers will want to benefit from increases in price, so they SWITCH PRODUCTION to the more demanded produced, to increase supply in order to be more profitable
• Rationing function:

  firms will increase prices. Consumers who can afford it, can pay for it. Good is rationed to those who can pay. Occurs when theres a shortage of a product, so firms deter some consumers from buying it
• Normal good: when income rises, demand for the good increases.
• Inferior goods: when income rises, demand for the good decreases
• Normal goods have a positive income elasticity of demand (YED)
• Inferior goods have a negative income elasticity of demand (YED)