Lecture Notes: Fdn Econs Micro 6 - YED & XED

Key Concepts

YED: Income Elasticity of Demand

• Definition: YED measures how the quantity demanded of a good responds to a change in consumer income.
• Formula: YED = % Change in Quantity Demanded / % Change in Income.
• Interpretation:
  • YED > 1: Luxury goods (demand increases more than income increase).
  • YED < 1: Necessities (demand increases but less than income increase).
  • YED < 0: Inferior goods (demand decreases as income increases).
• Applications: Understanding consumer behavior, adjusting business strategies based on income changes.

XED: Cross Elasticity of Demand

• Definition: XED measures how the quantity demanded of one good responds to a price change in another good.
• Formula: XED = % Change in Quantity Demanded of Good A / % Change in Price of Good B.
• Interpretation:
  • XED > 0: Substitutes (demand for one good increases as the price of another increases).
  • XED < 0: Complements (demand for one good decreases as the price of another increases).
  • XED = 0: Unrelated goods (no effect on demand).
• Applications: Pricing strategies, understanding market competition.

Important Points

• Elasticities are important for businesses to understand market dynamics and consumer behavior.
• Strategic Pricing: Using YED and XED to set prices and predict consumer responses.

Practical Examples

• Discussed various examples illustrating YED and XED, including:
  • Luxury Cars: As income rises, demand for luxury cars rises (high YED).
  • Bread and Butter: Price increase in butter may decrease demand for bread (complements with negative XED).
  • Smartphones: New smartphone model might decrease demand for older models (substitute with positive XED).

Conclusion

• Grasping YED and XED helps in making informed decisions for pricing, marketing, and forecasting.
• Knowing elasticity concepts enhances understanding of consumer and market behavior.