Saturday, October 3, 2015

YED - Income Elasticity

YED - Income Elasticity

YED - is the responsiveness of the Qd, of a good, to the change in the incomes, (Y) of people demanding the good. Income, (Y) elasticity determines whether the good is normal or inferior.

Formula

Formula for computation

Graph for Reference.
• If YED is negative the good is an inferior good.
• If YED is positive the good is a normal good.
• If YED is positive but below one, the good is income inelastic (necessity)
• If YED is positive but above one, the good is income elastic (luxury)
• If YED = 0, a % change in income does not effect the Qd of the good
• If YED = 1, a % change in income = a % change in Qd of the good (Unitary Elasticity)
Another graph for reference is the Engel's curve.
As income increase the Qd for a normal good is positively related, Qd increase.
AS income increases the Qd for an inferior good is negatively related, Qd decrease

Examples

Answer - (B) An increase in the average income f consumers and an increase in the price of a variable input.

So, YED of a normal good (positive and increasing with incomes) drives up price as demand increases (shifts right) and as an input cost/resource cost increases (Determinant of Supply) supply shifts leftward increasing the price of the good more.

Example 2)

Answer is (D) X is an inferior good and is a compliment to Y.

as the cross-price elasticity is negative, we understand that means the two goods are compliments
and as the YED (income elasticity of demand) is negative the good is an inferior good

Example 3)

(b) You must know that a negative coefficient is an inferior good and that as incomes rise less of the good is demanded. (leftward shift of the demand curve)

XED Cross Price Elasticity - Substitutes

XED Cross Price Elasticity - Substitutes

XED - responsiveness of the Qd of a good (Good A) to a change in the price of another good (Good B). Cross elasticity determines whether the goods are substitutes or complements.

Formula -
Understand: That you will be given a price change of one good (Good A) and then will compare it with the quantity change of another good (Good B).

Understand: You should be able to recognise that a positive XED (more than zero) is a substitute.

Substitutes are like Coke and Pepsi, Beef and Chicken. Goods that are substituted for one another.

If the price of Coke increases then people will switch to the cheaper good (Pepsi)

Price of Coke Increases and the Quantity Demand for Pepsi Increases
Notice the positive relationship.

Opposite is also true, if the price of Coke decreases the Quantity demanded for Pepsi decreases

again the formula:

8 - 6/6     OR    .333 = 1.333
5 - 4/4                .25

SO, no absolute value for XED (like PED) and more than zero (positive) and therefore a substitute.

Weakly related or strongly related substitutes I haven't seen tested in the AP Exam but references were there in some questions.

To Know: Substitutes

1) XED - responsiveness of the Qd of a good (Good A) to a change in the price of another good (Good B). Cross elasticity determines whether the goods are substitutes or complements.

2) No absolute value for XED

3) XED > 0 -  Substitutes

4) Positive = Substitutes

5) Price of Good A increase the Quantity Demand of Good B increases or the price of good A decreases and the Quantity Demand of good B decreases

Examples -

Look at (b) (ii) one point is earned for explaining that peanuts and bananas are substitutes and since the price of bananas increased it would cause the demand for peanuts to increase.

Also look at (c) (i) One point is earned for stating that the substitution effect causes the quantity of bananas demanded to decrease.

The Substitution Effect - one of the three reasons the demand curve slopes down - as the price of one good rises, consumers will switch to the cheaper good.

XED (Cross Price Elasticity) Compliments

XED (Cross Price Elasticity)

XED - the responsiveness of the Qd of a good (Good A) to a change in the price of another good, (Good B). Cross price elasticity determines whether the goods are substitutes or complements.

Formula

Understand:  That you will be given a price change of one good (Good A) and then compare it with the quantity change of another good (Good B) and will use this formula for computations.

Understand: That it is more likely that you should be able to recognise that a negative XED (less than zero) is a compliment.

Complements are like bread and butter or hamburgers and fries or Korean fried chicken and beer. Two goods that are consumed/used together.

If the price of Korean Fried chicken increases then we would expect a less quantity demanded of Korean fried chicken. Less fried chicken mean less beer consumed as they are consumed together.

So, price of good A (Korean Fried Chicken) increases and therefore the amount of beer consumed decreases (good B) Price increases and Qd decreases.

again the formula
So, 6 - 8/8    or    -.25    which is -1
5- 4/4             .25

So, no absolute value for XED (like PED) and less than 0 (negative) means that the two goods are compliments.

(Obviously, the opposite holds true - If the price decreases (good A) then the Qd of good B will increase.)

Weakly related or strongly related compliments I haven't seen tested in the AP exam but the reference was there in a couple of questions.

To know: Compliments

1) XED - (Cross price elasticity) - definition - the responsiveness of the Qd of a good (Good A) to a change in the price of another good, (Good B). Cross price elasticity determines whether the goods are substitutes or complements.

2) No absolute value for XED

3) XED < 0, then compliments

4) Negative = Compliment

5)  Price increases and Qd decreases or Price decreases and Qd increases.

Examples: I have only found one example.

Answer is (D) X is an inferior good and is a compliment to Y.

as the cross-price elasticity is negative, we understand that means the two goods are compliments