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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

what is shortrun
Rejoice Reply
short run is when at least one factor of production is fixed for example land
Nigel
explain the various de terminates of own price elasticity
Kwotega Reply
what do you understand by competitive firm?
Nisha Reply
yea
Tinashe
yoo
Issah
these things really confuse me a lot
Tinashe
it's very sample but i don't know how can i halp you
Moraswi
ya these are all confusing
Yuva
Therefore a competitive firm is whereby two or more firms produce a particular goods or are engaged in the same business.
Kusi
A competitive firm aims at profit and it can only be achieved based on the demand curve
Kusi
theoretically the PC firm can make no economic profit on the LR
Nelsonomics
Definition of government budget
Anand Reply
what is inelasticity
Alfayo Reply
what's utility ?
Ilyass Reply
Utility means to get satisfaction from the goods which are consuming. And it can not be measure in numerical terms
rajat
when we are buying some goods and these goods gave us satisfaction this kind of satisfaction are called utility
rmaan
Hmmmm
rajat
it is the satisfaction derived from goods and services
Emmanuel
hi i am new and i am student ecnomics 1st semester
Aj
i would like to learn from you people some thing special
Aj
it can assume by Calculating Marginal utility
bechar
it is the happiness business
Aj
how to determine total utility
Annette Reply
total utility = average utility *quantity
Mate
discuss various types of equilibrium
George Reply
when the price and quantity intersect each other in graph
Abul
what is Quantity Supply?
Nhoraine Reply
It is the amount of good's the supplies are willing to supply with a certain price
Alfayo
to the market
Alfayo
*"Goods the suppliers are willing to supply at a given price" (sorry, auto-'in'correct)
Nelsonomics
definition of microeconomics
Marion Reply
Branch of economics that deals with micro behaviour of individuals in a society. It deals with theory of Demand, Production, Firm and Welfare
jUKUN
Is a branch of economics that deals with the individual agents in an economy or in a country.
ADEYEMI
The concept of monopoly
Francis Reply
Ed Afrah
Ed
two different meaning of economics
Abraham Reply
If the magnitude of the elasticity of demand is less than 1 at the current price and the price of a major input to production falls, ------- will reap more of the benefits than --------.
Sherry Reply
What is international trade
Kehinde Reply
Think this is trade that is either carried between two countries or territorial blocks that have agree to export and import goods and services from each other
Timothy
how international trade work
Nikki
disadvantages of debt capital
Tonga
why economists should not disagree?
Tonga
marginal utility slope
Ajit Reply
what is the difference between inductive and deductive economics
joe
also difference between descriptive economics and applied economics
joe
also difference between descriptive economics and applied economics
Christo

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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