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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 economic integration
Mohamed Reply
why does it makes sense to let the sewage disposal company in your town have a monopoly?
Janice Reply
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Janice
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Janice
The principle of Economic is one to be involved in any economic buying substance
Anastassiya Reply
reason of corporation
Mohamed
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Mohamed
what are the principle of economics?
oche Reply
What is (Qs)
Bigi Reply
What is (Qs) and (Qd)
Bigi
Quantity of supply and Quantity of demand
Dilshoda
Qs: Is quantity of supply and Qd: quantity of demand
Cabdikariim
give as me quantitys
ahmed
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oche
i science that studies human behavior as a relationship between ends and scarcity that have alternative uses
ousman
okay......
oche
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oche
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Soudani Reply
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Soudani
for the stability and growth of any reign.
Fayaz
what is macro economics.?
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Fayaz
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Mohamed
how does economics define me
clement Reply
what are the factors that determines the demand and supply
sillah
what are the importance of Economics
Betty Reply
tell me something very important about economics..
Fayaz Reply
how may I solve arithmetic mean ,,,all example
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Itoe Reply
simple method of understanding cost concept
Oludare Reply
what is inflation
Christiana Reply
Inflation is a general increase in price levels
Zuko
is the action of inflating something
Abdifatah
inflation is the persistent increase in general price level of goods and services in an economy over a considerable period of time .
Tetteh
inflation is the general increase of a commodity in a particular period of time.
Turay
inflation is a general increase in price levels of commodities
shehu
what are the types of inflation?
Ebrima
inflation is the period of persistent rise in the general level of the price of goods services over time
Emmanuel
we have creeping inflation, demand pull inflation ,cost push inflation, and galloping inflation .
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I s Nigeria in any kind of in inflation? If yes which kind?
Martins
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Jonathan
and u
ahmed
no discassion just question
Aliraza
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Sadanu
how can a location of a firm create difference between producers
joy Reply
what is monetary policy
joy
hello
Abdifatah
is a monetary from policy that's authorized of country encharces
Abdifatah
What would you say about the the mobility of enterprise as a factor of production?
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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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