Cross Elasticity of Demand
Cross elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good changes. Also called cross price elasticity of demand, this measurement is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in price of the other good.
The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.
Exy=%change in quantity demanded of product X/%change in price of product Y.
Assumptions about the Cross Elasticity of Demand
There are certain assumptions about the Cross elasticity of Demand;
- If the products are substitutes then the cross elasticity of demand will be positive and best example of this case is when the price of printers changes.
- If products are complements then the cross elasticity of demand will be negative and the best example of this case is when the price of the printer and cartridges changes.
- If products are unrelated means that price change of one product have no effect on the other product then the cross elasticity of demand will be zero and the best example of this case is when the prices of peanuts increases this have no effect on the prices of cars.
Income Elasticity of Demand
Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain good to a change in real income of consumers who buy this good, keeping all other things constant. The formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income. With income elasticity of demand, you can tell if a particular good represents a necessity or a luxury.
Income Elasticity of demand is measured by Ei
Ei=% change in quantity demanded/% change in income
If Ei is positive then the good or product is superior good or normal good.
And when Ei is negative then the good or product is inferior goods.
Ei is used to see how different industries do under different circumstances. Generally some industries do better as income of the population rises for example automobiles (+3.0), Restaurants (+1.4). For some industries Ei is low showing that they perform poorly as income rises for example agriculture (0.2).
March 11, 2019