All Flashcards
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.
A graph shows the demand curve shifting right as income increases. What does this illustrate?
This illustrates a normal good, where demand increases with income.
A graph shows the demand curve shifting left as income increases. What does this illustrate?
This illustrates an inferior good, where demand decreases with income.
A graph shows the demand curve for good A shifting right when the price of good B increases. What does this suggest?
Goods A and B are substitutes.
A graph shows the demand curve for good A shifting left when the price of good B increases. What does this suggest?
Goods A and B are complements.
How would a graph of the used car market change during a recession?
The demand curve would shift right, indicating increased demand at each price point.
How would a graph of the smartphone market change if consumer income decreases?
The demand curve would shift left, indicating decreased demand at each price point (assuming smartphones are normal goods).
How does a rightward shift in the supply curve for smartphone cases affect the equilibrium?
It leads to a lower equilibrium price and a higher equilibrium quantity of smartphone cases.
Explain how to graphically represent substitutes using demand curves.
An increase in the price of one good shifts the demand curve for its substitute to the right.
Explain how to graphically represent complements using demand curves.
An increase in the price of one good shifts the demand curve for its complement to the left.
How does the graph of a 'sticky good' appear when income changes?
There is no shift in the demand curve.