Cross Elasticity of Demand Figure 5.7 and Income Elasticity of Demand in detail.

Demand is influenced by several factors. The sensitivity of the demand changes in response to different such factors is referred to elasticity. In this case, cross elasticity of demand is the measure of responsiveness of quantity demanded of a good to changes in the price of a substitute or complements, ceteris paribus (Mishra 112). Taking an example of Coca-Cola and Pepsi offers the best example of substitutes while Colgate and toothbrush are compliments. Since the two are substitutes,   if the price of Coca-Cola rises, the quantity demanded of Pepsi will rise as people would prefer Pepsi relatively cheaper. The percentage rate of change in quantity demanded of Pepsi when price of Coca-Cola changes becomes Pepsi’s cross-price elasticity of demand. When price of Colgate go up, the quantity demanded of toothbrush will fall and that constitute the cross price elasticity of toothbrush.

Substitutes Fig.1                                                                                     Compliments Fig.2

Price of Coca-Cola                                                                                     Price of Colgate

P2

P1                                                                                                  p2

P1

 

Q1          Q2                                                                           Q2    Q1

Quantity of Pepsi                                                                                        Quantity of t/brush

In fig 1, rise in price of Coca-cola from pi to p2 leads to rise in quanity demanded of Pepsi from Q1 to Q2. The cross price elasticity of Pepsi will be calculated as ;

Cross elasticity of Pepsi={ (Q2-Q1)Pepsi/(P2-P1)Coca-cola)}*100

In fig 2, rise in price of Colgate from P1 to P2 leads to fall in quantity demanded of toothbrush from Q1 to Q2. The cross price elasticity of toothbrush will be calculated as;

Cross elasticity of toothbrush= { (Q2-Q1)t/brush/(P2-P1)Colgate)}*100

Price elasticity is the measure of responsiveness of quantity demanded of a good to changes in its prices, ceteris paribus (Hirschey 183). When the price goes up, the quantity demanded goes down and vice versa. Taking the example of changes in price of bread versus the quantity demanded will be as shown below.

 

Demand curve of Bread. Fig 3

 

Price of Bread

P2

P1

 

Q2      Q1

Quantity demanded

From the fig 3 above, while the price of bread rises from P1 to P2, the quantity demanded falls from Q1 to Q2.

Therefore, the price elasticity of demand of Bread is;

Price elasticity of Bread={ (Q2-Q1) /(P2-P1))}*100

 

Response 2: The range of price elasticity of demand figure 5.1 in detail

Hi,

Your position on the range of price elasticity of demand is valid and show in-depth knowledge in economics. It is worth to note that price elasticity is the sensitivity of change in quantity of a good demanded to changes in its prices. The direction of quantity demanded is dependent on the changes in price. Since demand function shows an inverse relationship in respect to price, in most cases, the price elasticity of demand is negative but the figure is indicated as absolute one. The negative aspect of it simply shows that the relationship between price and quantity demanded is inverse assuming other factors are held constant (Hirschey 183). In that regard, your argument is acceptable.

A product may be classified as price inelastic, price elastic and perfectly inelastic. In agreement with your post, when the changes in quantity demanded of a good are greater that change in price, this becomes price elastic. When the change in quantity demanded of a good is less than change in price, it is referred to as price inelastic. In a case where change in quantity demanded is zero while price changes, perfectly inelastic situation arises. I therefore strongly believe that your discussion on the concept of elasticity is true based on the assumptions of other factors held constant.

Get a 10 % discount on an order above $ 100
Use the following coupon code :
SKYSAVE