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By the end of this section, you will be able to:

  • Calculate the income elasticity of demand and the cross-price elasticity of demand
  • Calculate the elasticity in labor and financial capital markets through an understanding of the elasticity of labor supply and the elasticity of savings
  • Apply concepts of price elasticity to real-world situations

The basic idea of elasticity—how a percentage change in one variable causes a percentage change in another variable—does not just apply to the responsiveness of supply and demand to changes in the price of a product. Recall that quantity demanded (Qd) depends on income, tastes and preferences, the prices of related goods, and so on, as well as price. Similarly, quantity supplied (Qs) depends on the cost of production, and so on, as well as price. Elasticity can be measured for any determinant of supply and demand, not just the price.

Income elasticity of demand

The income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income.

Income elasticity of demand = % change in quantity demanded % change in income

For most products, most of the time, the income elasticity of demand is positive: that is, a rise in income will cause an increase in the quantity demanded. This pattern is common enough that these goods are referred to as normal goods . However, for a few goods, an increase in income means that one might purchase less of the good; for example, those with a higher income might buy fewer hamburgers, because they are buying more steak instead, or those with a higher income might buy less cheap wine and more imported beer. When the income elasticity of demand is negative, the good is called an inferior good    .

The concepts of normal and inferior goods were introduced in Demand and Supply . A higher level of income for a normal good causes a demand curve to shift to the right for a normal good, which means that the income elasticity of demand is positive. How far the demand shifts depends on the income elasticity of demand. A higher income elasticity means a larger shift. However, for an inferior good, that is, when the income elasticity of demand is negative, a higher level of income would cause the demand curve for that good to shift to the left. Again, how much it shifts depends on how large the (negative) income elasticity is.

Cross-price elasticity of demand

A change in the price of one good can shift the quantity demanded for another good. If the two goods are complements, like bread and peanut butter, then a drop in the price of one good will lead to an increase in the quantity demanded of the other good. However, if the two goods are substitutes, like plane tickets and train tickets, then a drop in the price of one good will cause people to substitute toward that good, and to reduce consumption of the other good. Cheaper plane tickets lead to fewer train tickets, and vice versa.

The cross-price elasticity of demand    puts some meat on the bones of these ideas. The term “cross-price” refers to the idea that the price of one good is affecting the quantity demanded of a different good. Specifically, the cross-price elasticity of demand is the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B.

Questions & Answers

in 2021 Amazon reduced the annual subscription fee for its prime membership service which provides free two_day shipping on many goods and other benefits, from $119 to $99. Zoppa consulting, an investment firm estimated that before the price reduction, prime had 62million subscribers globally. If so, what is the arc elasticity of demand for a prime membership.
Joan Reply
Differences between microeconomics and macroeconomics
tatiana Reply
what is Economics
Ebem Reply
the branch of knowledge concerned with the production, consumption, and transfer of wealth and has Influence by sociology!!!!
Ajay
Economics is the study of how humans make decisions when they want to fulfil their requirements and desires for goods, services and resources.
Abdullah
Economics is the study how humans make decisions in the faces of scarcity.
Rose
economic is the study of how human make decision in the fact of scarcity.
Toang
Economics is a social science which study human behavior as a relationship between earn and scarce mean which have alternative uses
Juliet
what is market structure
Fatima
market structure in economics depicts how firms are differentiated and categorised based on types of goods they sell and how their operations are affected by external factors and elements.
Nasir
what is economic theory
Madara
what is demand
Gooluck Reply
demand is the willingness to purchase something
Mohamed
demand is the potential ability or williness to purchases something at a particular price at a given period of time..
Ahmed
Demand refers to as quantities of a goods and services in which consumers are willing and able to purchase at a given period of time. Demand can also be defined as the desire backed by ability to purchase .
Fadiga
what is demand
John Reply
is the production of goods in scarcity
David
thanks
John
Demand refers to as quantities of a goods and services in which consumers are willing and able to purchase at a given period of time.
Fadiga
what is demand of supply
music Reply
What is the meaning of supply of labour
Anthonia Reply
what is production?
Elizabeth Reply
Production is basically the creation of goods and services to satisfy human wants
Anthonia
under what condition will demand curve slope upward from left to right instead of normally sloping downward from left to right
Atama Reply
how i can calculate elasticity?
Tewekel Reply
What is real wages
Emmanuella Reply
what are the concept of cost
Tabitha Reply
what is the difference between want and choice
Grace Reply
Want is a desire to have something while choice is the ability to select or choose a perticular good or services you desire to have at a perticular point in time.
Dalton
substitutes and complements
Amman Reply
Substitute are goods that can replace another good but complements goods that can be combined together
nkanyiso
account for persistent increase in lnflation
niwahereza Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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