ECONOMICS

Economics

Economics

Defines the following three terms:

Elasticity of demand

The elasticity of demand is measured by calculating the percentage that varies the quantity demanded of a good when its price varies by one percent. If the result of the transaction is greater than one, the demand for that good is elastic if the result is between zero and one; demand is inelastic (Frank, 2004).

Cross-price elasticity

The cross elasticity of demand measures how it evolves and changes the demand for goods where the price changes of another. If goods are substitutes (e.g. different brands of cars) increased the price of Brand X can increase sales of the brand and so the cross-elasticity will be positive.

Income elasticity

Inferior goods can be distinguished from ordinary goods by their income elasticity of demand. The formula for measuring income elasticity is the percentage change in quantity demanded/ percentage change in income. A normal good will always have a positive income elasticity because quantity demanded and income either both increases (giving a plus divided by a plus) or both decrease (giving a minus divided by minus). An inferior good, however, will always have a negative elasticity because the signs on the top and bottom of the formula will always be opposite (a plus divided by a minus or a minus divide by plus giving a minus answer in both cases).

Explain the elasticity coefficients for each of the three terms

Elasticity of demand

The coefficient of price elasticity of demand (e) is a measure of the percentage change in quantity demanded of one item per unit time, which is a percentage change in the price of the item. As the price and quantity demanded are inversely related, the coefficient of price elasticity of demand is negative, which is typically removed by inserting a minus sign (-) in the formula e. Yes? Qd represents the change in quantity demanded of an article due to a change in the price? P, the coefficient of elasticity is defined as:

Cross-price elasticity

The coefficient of price elasticity of good X with respect to good Y is defined as:

Income elasticity

The coefficient of income elasticity of demand and I are calculated by dividing the percentage change in demand by the percentage change in income.

Contrast the terms defined in part A.

When change in quantity demanded is measured with respect, to change in price of the commodity it is called price elasticity of demand. When change in quantity is measured with respect, to change in income of the buyers it is called Income Elasticity of Demand. When change in quantity demanded of one commodity, is measured with respect, to change in price of the other commodity it is called Cross Elasticity of Demand (Kreps, 1990).

Explain the significance of differences among the three terms you contrasted in part C.

In the elasticity of demand, we calculate the elasticity on the basis of the demand variance of the product while, in price elasticity, the elasticity is calculated on the basis of the variation in the price in both cases the value ...