Elasticity

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.

Income

If the consumer income increases, the consumer will be able to purchase a higher quantity of goods and services. The income elasticity of the demand, measures the responsiveness of the demand with respect to changes in the consumer income.

The income elasticity of the demand is defined as the proportional change in the quantity demanded, divided the proportional change in the income.

ei = (ΔQ/Q)/(ΔI/I)

Where:

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:

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:

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.

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?

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