3.3.2 Price, income, and cross elasticities of demand

• Elasticity of demand measures how much the quantity demanded of a good responds to a change in its price, income, or the price of related goods
• Price elasticity of demand measures how quantity demanded changes with price.


  True
• Match the elasticity type with its definition:

  Price Elasticity of Demand ↔️ Measures how quantity demanded changes with price

  Income Elasticity of Demand ↔️ Measures how quantity demanded changes with income

  Cross Elasticity of Demand ↔️ Measures how quantity demanded of one good changes with the price of another
• The formula for price elasticity of demand is E_{d}
• If the price elasticity of demand is -0.5, demand is inelastic.


  True
• The formula for price elasticity of demand is the same as for income elasticity of demand.

  False
• What does it mean if demand is inelastic?

  PED < 1
• What is the formula for calculating the price elasticity of demand (PED)?

  $E_{d} =$ \frac{\% \text{ Change \in Quantity Demanded}}{\% \text{ Change \in Price}}
• If PED < 1, demand is inelastic
• Calculate the PED if the price increases by 10% and the quantity demanded decreases by 5%.

  -0.5
• What is the formula for calculating the income elasticity of demand (YED)?

  $E_{y} =$ \frac{\% \text{ Change \in Quantity Demanded}}{\% \text{ Change \in Income}}
• If YED = 1, the good is classified as unitary elastic, and its quantity demanded increases proportionally
• What type of good is classified if YED < 1, and its quantity demanded increases less than proportionally with income?

  Inferior good
• If the price of milk increases by 10% and the quantity demanded decreases by 5%, the PED is -0.5, indicating inelastic demand.
• Calculate the PED if the price of apples increases by 15% and the quantity demanded decreases by 10%.

  -0.67
• What is the formula for calculating the income elasticity of demand (YED)?

  $E_{y} =$ \frac{\% \text{ Change \in Quantity Demanded}}{\% \text{ Change \in Income}}
• What does income elasticity of demand (YED) measure?

  Change in quantity demanded with income
• A positive YED value indicates a normal good.


  True
• What type of good are organic vegetables in the example above?

  Luxury good
• If consumer incomes rise by 10% and the quantity demanded of luxury watches increases by 25%, the YED is 2.5
• What does cross elasticity of demand (CED) measure?

  Change in demand of one good with the price of another
• What does elasticity of demand measure?

  Responsiveness to changes
• What does income elasticity of demand measure?

  Income and demand changes
• Price elasticity of demand measures the responsiveness of quantity demanded to a change in price.


  True
• What is the formula for price elasticity of demand?

  \frac{\% \text{ Change \in Quantity Demanded}}{\% \text{ Change \in Price}}
• The three main types of elasticity of demand are price elasticity, income elasticity, and cross elasticity
• Order the different levels of price elasticity of demand from least responsive to most responsive:

  1️⃣ Inelastic (PED < 1)

  2️⃣ Unit Elastic (PED = 1)

  3️⃣ Elastic (PED > 1)
• When demand is elastic, a change in price leads to a more than proportional change in quantity
• If PED = 1, demand is unit elastic, meaning quantity demanded changes proportionally to the price change.


  True
• A PED value of -0.5 indicates that the demand for the product is inelastic
• If YED > 1, the good is classified as a normal good, and its quantity demanded increases more than proportionally with income.


  True
• Calculate the YED if a 10% increase in income leads to a 20% increase in the quantity demanded of a good.

  2
• Match the type of elasticity with its definition:

  PED ↔️ Measures how quantity demanded changes with price

  YED ↔️ Measures how quantity demanded changes with income

  CED ↔️ Measures how quantity demanded of one good changes with the price of another
• If PED < 1, demand is inelastic, meaning quantity demanded changes less than proportionally to the price change.


  True
• A PED value of -0.67 indicates that the demand for apples is inelastic
• If YED > 0, the good is a normal good, and its quantity demanded increases with income.


  True
• The formula for income elasticity of demand (YED) is \frac{\% \text{ Change \in Quantity Demanded}}{\% \text{ Change \in Income}}</latex>
• What does a negative YED value indicate?

  Inferior good
• If income rises by 5% and the quantity demanded of organic vegetables increases by 10%, the YED is 2
• A YED greater than 1 indicates a luxury good.

  True