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Elasticity of Demand

Key words and definitions for elasticity of demand for Leaving Cert

TermDefinition
Elasticity of Demand Elasticity of demand shows how sensitive or responsive demand is to: 1. A change in the price of the good itself 2. A change in consumers’ income 3. A change in the price of another good
Price Elasticity of Demand (PED) Measures the percentage change in the demand for a good caused by the percentage change in the price of that good.
Income Elasticity of Demand (YED) Measures the percentage change in the demand for a good caused by the percentage change in consumers' income.
Cross Elasticity of Demand (CED) Measures the percentage change in the demand for a good caused by the percentage change in the price of another good.
Alfred Marshall (1842-1924) Was one of the first economists to apply the use the use of mathematics to illustrate economic theory.
Information on elasticity of demand is needed by 1. The government/minister for finance 2. Producers/Suppliers 3. A price discriminating monopolist
Elasticity can be positive (+) or negative (-)
A negative (-) PED Means that as the price of a good increases the quantity demanded decreases and vice versa. This applies to normal goods.
A positive (+) PED Means that as the price increases the quantity demanded decreases and vice versa. This applies to a giffen good.
A negative (-) YED Means that as income increases the quantity demanded decreases. This applies to a giffen good.
A positive (+) YED Means that as the price goes up the quantity demanded goes down and vice versa.
Normal goods: Obey the law of demand; have a negative (–) PED and have a positive (+) YED e.g. a foreign holiday.
Inferior goods: Obey the law of demand; have a negative (–) PED and a negative (–)YED you buy because you cannot afford a better alternative. Eg. Cheap cuts of meat e.g. Mince/Pasta.
Giffen goods:
A negative (-) CED
A positive (+) CED
Complementary goods:
Subsitute goods
The numerical value of elasticity indicates if the good is: Elastic, unitary elastic or inelastic.
Elastic
Unitary elastic
Inelastic
Created by: pdsteconomics
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