Define Income Elasticity of Demand.
Measures how sensitive quantity demanded is to changes in income.
What is a Normal Good?
A good for which demand increases as income increases.
What is an Inferior Good?
A good for which demand decreases as income increases.
Define Cross-Price Elasticity of Demand.
Measures how sensitive the quantity demanded of one good is to a change in the price of another good.
What are Substitute Goods?
Goods that can be used in place of each other; if the price of one increases, demand for the other increases.
What are Complement Goods?
Goods that are used together; if the price of one increases, demand for the other decreases.
What does a positive Income Elasticity indicate?
The good is a normal good.
What does a negative Income Elasticity indicate?
The good is an inferior good.
What does a positive Cross-Price Elasticity indicate?
The goods are substitutes.
What does a negative Cross-Price Elasticity indicate?
The goods are complements.
If income increases and demand for bus tickets decreases, what type of good are bus tickets?
Inferior good.
If the price of coffee increases and demand for tea increases, how are coffee and tea related?
Substitutes.
If the price of hot dogs increases and demand for hot dog buns decreases, how are hot dogs and hot dog buns related?
Complements.
How does income elasticity explain the demand for organic food as income rises?
If demand for organic food increases with income, it's a normal good with positive income elasticity.
During a recession, demand for used cars increases. What does this say about used cars?
Used cars are likely inferior goods, as demand increases when income decreases.
How does cross-price elasticity explain the relationship between Coke and Pepsi?
They are substitutes. If the price of Coke rises, the demand for Pepsi will likely increase.
How does cross-price elasticity explain the relationship between coffee and sugar?
They are complements. If the price of coffee rises, the demand for sugar will likely decrease.
A new technology lowers the cost of producing smartphone cases. How does this affect the market?
Supply of cases increases, lowering the price and increasing quantity. This doesn't directly relate to income/cross-price elasticity but sets the stage for related goods analysis.
The price of a competing smartphone increases. How does this affect the demand for another smartphone brand?
Demand for the other smartphone brand will likely increase, as they are substitutes (positive cross-price elasticity).
If a good has an income elasticity of zero, how will a change in income affect demand?
A change in income will have no effect on the demand for the good.
Differentiate between Normal and Inferior goods based on income elasticity.
Normal goods have positive income elasticity; Inferior goods have negative income elasticity.
What is the key difference between substitutes and complements based on cross-price elasticity?
Substitutes have positive cross-price elasticity; Complements have negative cross-price elasticity.
Compare and contrast income elasticity and cross-price elasticity.
Income elasticity relates changes in income to changes in demand for a single good. Cross-price elasticity relates changes in the price of one good to changes in demand for another good.
How do the signs of elasticity values help differentiate between related and unrelated goods?
Positive or negative signs indicate the type of relationship (normal/inferior, substitutes/complements), while zero indicates unrelated goods.
What is the difference between the formula for income elasticity and cross-price elasticity?
Income elasticity uses % change in quantity demanded divided by % change in income. Cross-price elasticity uses % change in quantity demanded of good A divided by % change in price of good B.
How do substitutes and complements affect each other's demand curves?
Substitutes cause the demand curve of one good to shift in the same direction as the price change of the other. Complements cause the demand curve of one good to shift in the opposite direction as the price change of the other.
Compare the impact of a price increase on the demand for substitutes versus complements.
A price increase in one good increases demand for its substitute but decreases demand for its complement.
How do income and cross-price elasticities help in understanding consumer behavior?
Income elasticity helps predict how changes in income will affect spending on different goods. Cross-price elasticity helps predict how changes in the price of related goods will affect spending patterns.
What is the key difference in the interpretation of the absolute value of income elasticity for normal goods?
A higher absolute value indicates a more income-elastic normal good (luxury), while a lower value indicates a necessity.
What is the key difference between price elasticity of demand and cross-price elasticity of demand?
Price elasticity measures the responsiveness of quantity demanded to a change in the good's own price, while cross-price elasticity measures the responsiveness of quantity demanded to a change in the price of another good.
