The responsiveness of changes in quantity demanded to a change in the price of another good.
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Formula
percentage change in quantity demanded of good y divided by percentage change in price of good x
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Subsitutes
A good which can be replaced by another. Cross elasticity is positive
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Complements
A good which is demanded with another good. eg cereal and milk. Cross elasticity is negative.
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Substitution effect
If the price of a good rises consumers will buy less of that good and more of others. These changes are solely due to the change in the price of the good.
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Income effect
If the price of a good rises the real income of a consumer will fall and they will not be able to buy the same basket of goods as before. This change in demand is caused by change in real income.
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Giffen good
A good which a rise in price does not deter people from buying more, but when income increases more is demanded. A rise in the price leads to a rise in demand.
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Normal goods
Substitution effect and the income effect work in the same direction. As price rises demand falls.
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Inferior goods
Substitution effect makes demand fall as price has risen but income effect makes demand for the good rise. Substitution effect outweighs the income effect so demand falls.
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Giffen goods
Substitution effect makes demand fall as prices rise but income effect makes demand rise. Income effect outweighs the substitution effects so demand rises.
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Other cards in this set
Card 2
Front
percentage change in quantity demanded of good y divided by percentage change in price of good x
Back
Formula
Card 3
Front
A good which can be replaced by another. Cross elasticity is positive
Back
Card 4
Front
A good which is demanded with another good. eg cereal and milk. Cross elasticity is negative.
Back
Card 5
Front
If the price of a good rises consumers will buy less of that good and more of others. These changes are solely due to the change in the price of the good.
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