Cross and Income Elasticity

What does cross elasticity measure?

• Measures responsiveness of changes in quantity demanded to changes in price.

• Measures the responsiveness of the quantity demanded of

  a good or service to a change in income.

• Measures the responsiveness of the quantity demanded of one good to changes in price of another good.

What is the relationship between two good if Ex = -2

• Substitutes

• No relationship

• Complements

What is the relationship between two goods if Ex = 5

• Substitutes

• No relationship

• Complements

Calculate the co-efficient if the price of good A increased by 10% and the demand for good B fell by 5%

• 2

• -2

• 0.5

• -0.5

What type of good would have an Ey = 2

• Luxury

• Necessity

• Inferior

What type of good would have an Ey = -4

• Luxury

• Necessity

• Inferior

What type of good would have an Ey = 0.5

• Luxury

• Necessity

• Inferior

What does income elasticity measure?

• Measures responsiveness of changes in quantity demanded to changes in price.

• Measures the responsiveness of the quantity demanded of

  a good or service to a change in income.

• Measures the responsiveness of the quantity demanded of one good to changes in price of another good.

Using the mid-point method calculate the income elasticity of demand coefficient of demand when income increases from 30 000 to 35 000 and the QD of chocolates increases from 10 000 to 15 000

• 0.38

• 2.6

• 26

• 3.8

What are inferior goods?

• Lower quality goods that we consume when we are on lower incomes

• Higher quality versions of goods that we consume more of as our incomes rise

• Our basic needs. Things we need to survive e.g. housing clothing, food, power, transport

• Goods that can be used in place of each other

• Goods that we consume/use together