(e) Widgets and Pidgets have negative cross price elasticity of demand (XED)
Explain how the demand function for Widgets, Qd = 249 – 4P, is likely to change as a result of an increase in the price of Pidgets.
A Negative (XED) implies that the two goods are complements, so as the price of Pidgets increase the demand for widgets will decrease.
The demand for widgets will decrease and therefore the “a term” intercept or horizontal intercept or Q-intercept will decrease.
(f) Outline the meaning of the term unit elastic demand.
A change in the price of a product results in a proportionate (equal percentage) change in the quantity demanded.
(g) Explain the two determinates of PED.
Necessity – demand will be inelastic, as consumers will attempt to avoid reducing consumption, while any reduction is likely to be proportionally smaller than the change in price.
Substitutes – the more substitutes, demand will be price elastic as an increase in the price of the product is likely to lead to consumers switching to alternatives, causing the Qd (of the good) to decrease significantly.
Proportion of Income – if the price represents a small proportion of income, demand will be price inelastic, as a change in price will have little impact on the ability of the consumer to purchase the product.
Time – Consumers are more able to react to changes in price if they have more time, so demand is more price-elastic in a longer time period.
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