Income and cross-price responses
Diperkenalkan| English | Makna |
|---|---|
| cross elasticity of demand/krɒs ɪlæˈstɪsɪti ɒv dɪˈmænd/ | Elastisitas silang permintaan |
| income elasticity of demand/ˈɪŋkʌm ɪlæˈstɪsɪti ɒv dɪˈmænd/ | Elastisitas pendapatan permintaan |
A decision you can investigate
- A rail operator considers forecasts based on incomes and the price of a competing coach service.
- Own-price, income and another product’s price are three different stimuli.
Build the explanation
- YED = percentage quantity-demanded change divided by percentage income change. Positive values identify normal goods, negative values inferior goods for the observed group/range. Positive magnitude above 1 is income-elastic; between 0 and 1 income-inelastic; zero means no response. Perfect income elasticity is a theoretical limiting case of arbitrarily large responsiveness to a tiny income change.
- XED = percentage demand change for A divided by percentage price change of B. Positive XED suggests substitutes, negative complements, and approximately zero little measured relationship. Magnitude indicates responsiveness, not whether two products are physically similar.
Work through the evidence
- Income rises from 3000 to 3300, or 10%; rail journeys rise from 40 to 46, or 15%. YED=15/10=1.5: an income-elastic normal service in this observation.
- Coach fare rises 8%, while rail demand rises 4% with other conditions unchanged: XED rail relative to coach = 4/8=0.5, consistent with substitution. If parking becomes 10% dearer and car journeys fall 3%, XED car journeys relative to parking = −3/10=−0.3, consistent with complementarity.
What is rail YED in the income case?
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Demand rises 15% while income rises 10%.
Test the limits
- A product can change category across income groups or ranges. An inferior classification describes the income response, not defective quality. XED of A to B need not equal XED of B to A.
- Business forecasts need population, prices and confidence too; simultaneous changes can confound attribution. A government assessing indirect taxes or subsidies should ask whether consumers can switch and who bears the cost, not simply read a sign as a complete recommendation.
What sign is expected for complementary goods?
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A dearer complement can reduce demand for the associated good.
Cross elasticity can take different values depending on which product is placed in the numerator.
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True. The demand response and the percentage bases differ for each product, so XED of A with respect to B need not equal XED of B with respect to A.
Apply and explain your answer
- What does the positive cross response between coach fare and rail demand suggest?
- Some passengers treat the two services as substitutes; rail demand increases when coach fare rises.
A YED of −0.4 identifies
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The negative income response distinguishes the classification.
Use the terms precisely
- cross elasticity of demand 需求交叉弹性: Percentage demand change for one good relative to percentage price change of another.
- income elasticity of demand 需求收入弹性: Percentage demand change relative to percentage income change.
Match the terms to their meanings.
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Use each term for its stated economic relationship.
Income rises from 3000 to 3300, or 10%; rail journeys rise from 40 to 46, or 15%. YED=15/10=1.5: an income-elastic normal service in this observation. Coach fare rises 8%, while rail demand rises 4% with other conditions unchanged: XED rail relative to coach = 4/8=0.5, consistent with substitution. If parking becomes 10% dearer and car journeys fall 3%, XED car journeys relative to parking = −3/10=−0.3, consistent with complementarity.
A product can change category across income groups or ranges. An inferior classification describes the income response, not defective quality. XED of A to B need not equal XED of B to A. Business forecasts need population, prices and confidence too; simultaneous changes can confound attribution. A government assessing indirect taxes or subsidies should ask whether consumers can switch and who bears the cost, not simply read a sign as a complete recommendation.
YED = percentage quantity-demanded change divided by percentage income change. Positive values identify normal goods, negative values inferior goods for the observed group/range. Positive magnitude above 1 is income-elastic; between 0 and 1 income-inelastic; zero means no response. Perfect income elasticity is a theoretical limiting case of arbitrarily large responsiveness to a tiny income change.
Write from a coach fare
- Income rises from 2000 to 2200 and rail journeys from 50 to 53.
- A coach fare rises 10 percent and rail demand rises 2 percent. Say what the signs mean. Inferior does not mean poor quality.
Income rises from 2000 to 2200 and rail journeys from 50 to 53. A 10 percent coach-fare rise raises rail demand 2 percent, other factors fixed. Find the income elasticity and the cross elasticity.
YED uses the income change. XED uses another good's price. The sign says normal, inferior, substitute or complement.
What does the coach-fare result suggest?
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A positive cross response fits substitutes. Income-inelastic is not the same as inferior.