Microeconomics

The cross elasticity of demand measures the responsiveness of the quantity demanded, when the price of another good changes. It is defined as the percentage change in the quantity demanded divided the percentage change in the price of the second good.

eAB = (ΔQA/QA)/(ΔPB/PB)

The cross elasticity gives us important information about the economic relation between the goods and services.

Elasticity is a measure of the responsiveness of a variable. There are several types of elasticity. In this article, we discuss about them.

Substitute Goods

Definition of Substitute Goods

Substitute goods are those goods that can satisfy the same necessity, they can be used for the same end.

Examples of Substitute Goods

  • Coca-cola and Pepsi
  • Car, motorbike, bike and public transport
  • Butter and margarine
  • Tea and coffee
  • Bananas and Apples

Cross Elasticity of Demand of Substitute Goods

Cross elasticity is the percentage change in quantity demanded for a good  that occurs in response to a percentage change in price of anther good:

Ilustration: book

The distinction between macro and micro economics is the most usual classification of economic analysis.

Complementary

Definition of Complementary Goods

Complementary goods are goods that are usually consumed together or that have the ability to provide a higher utility when consumed together.

Models

A model is a representation of a theory or event. An economic model is a simplified representation of economic processes. This representation can be used to:

  • gain a better understanding of the theory,
  • to explain the theory to others
  • to generate hypotheses about economic behavior, that can be compared against economic outcomes.
  • to predict the outcome of economic policies.

The elasticity of the demand shows the responsiveness of the quantity demanded to a change in the price.

It is defined as the proportional change in the quantity demanded, divided the proportional change in the price.

e = (ΔQ/Q)/(ΔP/P)

When the price increases (+), the quantity demanded decreases (-): the demand elasticity is usually negative.

Graphically:

In economics, a production function represents the relationship between the output and the combination of factors, or inputs, used to obtain it.

Q=f(L,K)

Where:
- Q is the quantity of products
- L the quantity of labor applied to the production of Q, for example, hours of labor in a month.
- K the hours of capital applied to the production of Q, for example, hours a machine has been working for the production of Q.

There can be other inputs, K and L are just examples.

When the price of a product or service increases (for example: if the demand increases), the quantity produced usually increases. Similarly, when the demand decreases, the price decreases and the quantity produced usually decreases.

The variation in the quantity in the face of a price variation can be big or small. But how to measure if the responsiveness of the supply is big or small?

Economics

The most common division of economics is that which separates macroeconomics from microeconomics. The difference between macro and micro was introduced in 1933 by the Norwegian, Ragnar Frisch. The origin of the words says a lot about their meaning: in Greek, macro means big and micro means small.

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