Glossary
Complements
Goods that are typically consumed together, characterized by a negative cross-price elasticity of demand.
Example:
If the price of hot dogs increases, the demand for hot dog buns might decrease, as they are complements.
Cross-Price Elasticity
Measures how sensitive the quantity demanded of one good is to a change in the price of another good.
Example:
If the price of streaming services increases, and the demand for movie theater tickets goes up, this indicates a positive cross-price elasticity between them.
Elasticity
A general measure of how sensitive one economic variable is to a change in another economic variable.
Example:
If a small change in the price of a luxury item leads to a large change in the quantity demanded, the demand for that item is considered elastic.
Income Elasticity
Measures how sensitive the quantity demanded of a good is to changes in consumer income.
Example:
If a student's demand for gourmet coffee increases as their part-time job income rises, this shows a positive income elasticity for gourmet coffee.
Inferior Good
A good for which demand decreases as consumer income increases, indicated by a negative income elasticity of demand.
Example:
When a college student gets their first full-time job, they might stop buying instant ramen noodles, making instant ramen an inferior good.
Normal Good
A good for which demand increases as consumer income increases, indicated by a positive income elasticity of demand.
Example:
As a person's salary goes up, they might buy more organic produce, making organic produce a normal good.
Price Elasticity
Measures the responsiveness of the quantity demanded or supplied of a good to a change in its own price.
Example:
When the price of gasoline rises significantly, and people start driving less, this demonstrates the price elasticity of demand for gasoline.
Substitutes
Goods that can be used in place of each other, characterized by a positive cross-price elasticity of demand.
Example:
If the price of butter increases, consumers might buy more margarine instead, indicating that butter and margarine are substitutes.