Theory Of Demand~~~~PROJECT Part 2

In this episode, we'll be covering the YED, XED and their determinants.

YED is used to measure the responsiveness of Qd to a change in income(Y).

YED isn't as special as the PED 'cause,

1. They have a +ve and -ve value(normal)
2. No special cases(Yay for me! Don't need to wreck my head)
3. Just cause. Got a problem?

ANYWAYS~~~~

 The formula can be shown as YED=(%change in Qd) / (%change in Y)

It was stated in 1. that they have a +ve and -ve value, each having a meaning behind it. It being +ve shows that it is a normal G&S where else if YED were to be -ve, it shows that the G&S is inferior, meaning a G&S that is low rated.

If the YED>1, besides being elastic, the change in income would lead to a big change in demand. Say if income decrease by 10%(from $100 to $90), then you most probably would not want to buy that unnecessary junk food that costs around $10 in total. =D

If the YED<1, other than being inelastic, the change in income would have little impact in demand. This is normally the case for everyday G&S such as food supplies.

Elaborating on the -ve value of YED, if a consumers income were to increase by 10%, then he/she would be able to afford the normal ranking goods and ditch the inferior goods. Thus a decrease in Qd for the inferior G&S but an increase in the Qd of normal goods.

DETERMINANTS OF YED~~~

 Similar to the PED's determinants, it would be the degree of necessity and the proportion of income spent on the good. BECAUSE OF THIS, please refer to TOD~~~PROJECT Part 1 as how YED is affected is similar to the case of PED. =D

If the value of YED is >1, it is most probably a normal luxury good such as holiday trips.

If the value of YED is =0.5 it is most probably a necessity good such as food

If the value of YED is =-05, it is most probably an inferior basic good such as canned food(but some I would still buy even if my income increasesXD)

If the value of YED is <-1 it is most probably an inferior luxury good such as those 'fake' LV bags.

YED are most effectively used in 'boom period' where the economy of the country increase drastically. This would mean a sharp increase in income for many people. With this, the YED can show which goods are actually inferior goods, and which goods are elastic(visa versa) cetirus peribus.

Unfortunately, it is suggested that even during this boom period, firms producing inferior G&S should NOT increase their G&S price or expand as the Qd would decrease. Instead they should cut down supply and even try to start selling normal goods.

CROSS ELASTICITY OF DEMAND (XED)

The XED is used to measure the responsiveness of Qd of G&S to a change in Price of a related G&S.

The XED formula can be written as (%change in Qd of G&Sy) / (%change in P of G&Sx)

Like the YED, the XED can have a +ve and -ve value.

If the value of XED is +ve, it shows that they are substitute good(normally goods that are in high competition)

If the value of XED is -ve, it means that they are complement goods(stated in TOD~~~PROJECT Part 1. Please refer back. THANKS!!!)

If the XED > 1, then the goods are close substitute. Whereas if it were XED=0.5, then they are still substitute goods, just with low or no close substitutes.

If the XED < -1 then the goods are complement goods.

[Fun fact: If the complement good increases their price, it 'should' not make much of an impact on the Qd of the main good. For example, even if Mac Centre were to increase their photostatting price, it won't stop people from going to Taylor's College. HOWEVER, if Taylors were to increase THEIR Price, causing the Qd of both Taylor's College AND Mac Centre to decrease.]

DETERMINANTS OF XED~~~

Closeness of relationship between the 2 goods and whether they have close or good substitute or complement G&S.

LIMITATIONS OF ELASTICITY OF DEMAND CONCEPT~~~

Data inaccuracy:- In the real world, cetirus paribus is nearly impossible to follow as there are many factors that are changing CONSTANTLY!!! Because of this, it is nearly impossible to see how much of the change is caused solely of one reason. For example, it is difficult to calculate the PED, as you will need to single out how much of it's increase is attributed by change in price ALONE.