Egt 1 Task 2
Elasticity of demand is the relationship between the demands for a product with respect to its price. Generally, when the demand for a product is high, the price of the product decreases. When demand decreases, prices tend to climb. Products that exhibit the characteristics of elasticity of demand are usually cars, appliances and other luxury items. Items such as clothing, medicine and food are considered to be necessities. Essential items usually possess inelasticity of demand. When this occurs prices do not change significantly.
“The Cross-price elasticity of demand measures the rate of response of quantity demanded of one good, due to a price change of another good” (Economics.about.com, …show more content…
Cross-price elasticity can be defined as “the relative response of demand to changes in the price of another good, or the percentage change in demand for one good due to percentage change in the price of another good” (Amosweb.com. 2013). To calculate the coefficient of cross-price elasticity you divide the percentage in quantity demanded of product A by the percentage change in price of product B. When this formula generates a negative result the good is considered to be a complement. Lets say you have two products that are complements; an increase in the demand for the first product will cause the complementary product to increase in the quantity demanded. The coefficient of complement has a negative result when the price of product A increases causing demand for product B to change. A substitute is the opposite of a complement. A substitute would have a positive value for cross elasticity. When the demand for product A increases and the price of product B also increases this is classified as a substitute good.
“The income elasticity of demand quantifies the theoretical relationship between income and demand identified by the buyers’ income demand determinant”