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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 are free good
Maillot Reply
how do you determine price change
Matri Reply
what is economics?
Yaya Reply
what is economic
Nana Reply
Economics is the study of how Individual consumer, institution and society as a whole uses its available finite resources to satisfy infinite needs and wants
Explain the following concepts using suitable exemple. 1) National budget. 2) National debt
what is international trade
BOBO Reply
other things remain constant.
Esale Reply
explain scarcity
Richard Reply
scarcity occurs when there are not enough resources to satisfy human's needs and wants therefore we need to allocate our resources using the price mechanism.
scarcity is when there is inadequate resources to catch the unlimited wants which would compel individual to make choice.
scarcity simply means when there's a shortages of resources to satisfy Hunan's need and wants in a particular time, which means the demand for it at the moment is higher than the supply
scarcity simply means when there's a shortages of resources to satisfy humans need and wants in a particular time, which means the demand for it at the moment is higher than it supply.
That escalated real quick😂
scarcity is sometimes considered as the basic problems of economics resources r scarce because we live in a world of humans in which wants are infinite but the land labor and capital r required to satisfy those wants are limited
scarcity means unlimited resources
resources are limited but human wants can not be limited
joint or complementary demand
Ryt Reply
what is demand
Qudus Reply
it maybe define as the amount or quantity of goods and services which a consumer is willing to buy with the ability to pay at a given price at a particular time
yesoo thanks dear
Explain 3 reasons why the manufacturer may decide to sell directly to the consumers
why is economics a science
Isaac Reply
Because science is all about thinking by making models whether a computational or Mathematical. Economics is a social sciences because it effects society but to understand Economics we use maths so it is a Science
I hope.......Economic is social science because it makes new new currency of money,it is decided the country’s depend system and the system be repeated others benefits in our ...
so what is the disadvantages of mix economic system
Economics is regarded as a social science because it uses scientific methods to build theories that can help explain the behaviour of individuals, groups and organisations.
The question is: why is Economic a "science" and not why is economics a "social science?" Alright folks?
In my own understanding of why economics is a science it bcz it deals mainly on human resources just like biology that deals in the human body why economics is science it also deals on the management of human resources all over the world bcz without economics there will be no human resources
what is technology
my response to the earlier question is, economics is a science but not a pure science like biology, chemistry and physics. The reason is that those pure science study inanimate object while economics study human being, their experiment are predictable.
Economics is a social science subject that shows the relationship between ends and scarce means with their alternative uses
what is Equilibrium?
Fatima Reply
it means equal price and equal quality
thank u Arthur!
Equilibrium is a state of balance in an economy. In as far as market forces are reasonably concerned, equilibrium means the state at which the quantity of goods supplied is equal to the quantity of goods demanded.
what is labour
labor can be define as a both physical and mental effort of man put forward towards production
name the types of demand and explain any two
Joint demand Composite demand Competitive demand
Labourcan be defined as man mental and physical exertion
equilibrium is a state of balance especially between opposing forces or influences
equilibrium means the state of point in which a person is satisfied and after that point if that person consumes more than the satisfaction level will decrease.
Equilibrium is a state of balance in and economy. that mean equal privé and equal quality e.t.c.
Equilibrium is a situation in which economic forces such as supply and demand balance and in the absence of extremal lnfiuences the values of economic variables will not change.
what is elasticity
Motseoa Reply
difference between demand and supply
Adeyemi Reply
Demand- It is the desire of a buyer and his ability to pay for a particular commodity at a specific price. Supply- It is quantity of a commodity which is made available by the producers to its consumers at certain price.
yes OK thank you dear
Demand can be defined as the ability a buyer is willing and able to pay at a specific price and in agiven period of time Supply can be defined as the ability the producer is willing to supply with a specific price
what is labor force
demand represents the consumer while supply represents the firm
restriction on international trade
Ayim Reply
formula for price elasticity of demand
Lognyuu 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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