Carefully Explain What It Is That Price, Income and Cross Elasticities of Demand Are Meant to Measure. Use Appropriate Diagrams and Numerical Examples.

954 words 4 pages
Elasticity is a measure of responsiveness. It shows us how much something changes when there is another change in one of the other variables that determines it. There are three elasticities of demand that we consider, price elasticity of demand (PED), income elasticity of demand (YED) and cross elasticity of demand (XED).
An important aspect of a product’s demand curve is how much the quantity demanded changes when price is changed. The economic measure of this response in the price elasticity of demand (PED). It is most commonly calculated with the following equation:
PED = % change in quantity demanded of the product % change in price of product
The above formula will usually give a negative value, due to the inverse
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It also affects the extent to which changes in economic growth affect the level and pattern of demand for goods and services. This graph is a typical diagram for YED.

The income elasticity of demand for a product will also change over time – the vast majority of products have a finite life-cycle. Consumer perceptions of the value and desirability of a good or service will be influenced not just by their own experiences of consuming it (and the feedback from other purchasers) but also the appearance of new products onto the market.
Cross elasticity of demand is a measure of how much the demand for a product changes when there is a change in the price of another product. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good, using the following equation:

XED = % change in quantity demanded of the product X % change in price of product Y

For example, the owners of a pizza stand find that when their competitor, a hamburger stand, lowers the price of a burger from £2 to £1.80, the number of pizza slices that they sell each week falls from 400 to 380, because of the lowered price of a burger. The competitors price has fallen by -10% and the quantity demanded of the pizza slices has fallen by -5%, therefore:

XED = -5% -10%

XED = 0.5

Two goods that complement each