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Elasticises (Income elasticity of Demand (YED) (measures the change in…
Elasticises
Income elasticity of Demand (YED)
measures the change in demand compared to the change in income.
in income ^ -> D for normal goods ^, D for inferior goods V
Normal goods have a positive YED, inferior goods have a negative YED
A Giffen good is one where when price increases, demand also increases
Cross elasticises of demand (XED)
It measures the change in demand of one good when the price of another good changes
substitutes
if the price of one good rises, and the demand of a different good goes up as a result, then the second good is a substitute
a substitute is a good which can easily be replaced by another good.
complements
if the price of one good rises, and the demand of a second good falls as a result, then they are complements
a complement is a good which is used with another good
Elastic vs inelastic
Elastic
Horizontal
it is greater than 1
the response is greater than the change. e.g. demand changes more than price
Inelastic
Vertical
it is lower than 1
the response is less than the change
unitary elasticity
it is 1
the response is proportional to the change
Price elasticity of demand (PED)
this is how much the demand for a product changes with a change in price.
it is determined by the number of available substitutes and time
Price elasticity of supply (PES)
it is how much supply changes when price changes
determined by...
time
spare capacity - if it increases, then elasticity increases also
Availability of factors of production - the more available, the more elastic
Wage elasticity of Demand (WED)
how far the demand for labour changes with the change in wage rate
factors
the PED of the product produced (the more elastic PED, the more elastic WED)
proportion of total cost made up of labour costs
time (the longer the time the more elastic)
how easily you can substitute labour for foreign labour