- Define elasticity. What is the price elasticity of demand, price elasticity of supply, income elasticity of demand, and cross elasticity of demand? 13
- There are two types of products such as complementary goods and substitute goods for your products. How you can use the cross elasticity of demand to determine whether some products are complementary goods or substitute goods of your goods? For example, if the cross elasticity of demand is negative, is it a product of your competitor’s complementary goods or substitute goods? If the income elasticity of demand for your goods is negative, are your goods inferior goods or normal goods?
Week 3 Discussion: Elasticity
1. Definition of Elasticity:
The measure of the sensitivity or responsiveness of an economic variable to a change in another economic variable is regarded as Elasticity. The quantification is done as the ratio between the percentage change in one economic variable to the percentage change in another economic variable (Dean et al. 2020). The most commonly used economic variable about elasticity is the percentage change in quantity demanded or supplied concerning the percentage change in price.
Price Elasticity of Demand:
The measure of responsiveness or sensitivity of the percentage change in quantity demanded of a commodity concerning a percentage change in the price of the commodity, measured as a ratio between the two, is regarded as the price elasticity of demand (Dean et al. 2020). The more the value of the elasticity is, the more the sensitivity of the change in quantity demanded of the commodity to a change in the price of the commodity. The formula used for measuring the price elasticity of demand is: Price Elasticity of Demand = (% change in quantity demanded / % change in price)
Price Elasticity of Supply:
The measure of responsiveness or sensitivity of the percentage change in quantity supplied of a commodity concerning a percentage change in the price of the commodity, measured as a ratio between the two, is regarded as the price elasticity of supply (Dean et al. 2020). The more the value of the elasticity is, the more the sensitivity of the change in quantity supplied of the commodity to a change in the price of the commodity. The formula used for measuring the price elasticity of supply is:
Price Elasticity of Supply = (% change in quantity supplied / % change in price)
Income Elasticity of Demand:
The measure of responsiveness or sensitivity of the percentage change in quantity demanded of a commodity concerning a percentage change in the income of the consumers or buyers of that commodity, measured as a ratio between the two, is regarded as the income elasticity of demand (Mankiw, 2020). The value of income elasticity of demand of a commodity depicts whether the commodity is an inferior good (negative income elasticity of demand), normal good (income elasticity of demand greater than 0 but less than 1), or a luxury good (income elasticity of demand greater than 1) (Mankiw, 2020). The formula used for measuring the income elasticity of demand is: Income Elasticity of Demand = (% change in quantity demanded / % change in income)
Cross Elasticity of Demand:
The measure of responsiveness or sensitivity of the percentage change in quantity demanded of a commodity concerning a percentage change in the price of another commodity, measured as a ratio between the two, is regarded as the cross-price elasticity of demand (Mankiw, 2020). The value of the cross-price elasticity of demand of a commodity depicts whether the two commodities are related or not, that is, whether the two goods are complements (negative cross-price elasticity of demand), substitutes (positive cross-price elasticity of demand), or independent (zero cross-price elasticity of demand) to each other (Mankiw, 2020). The formula used for measuring the income elasticity of demand is:
Cross-price Elasticity of Demand = (% change in quantity demanded of Good X / % change in the price of Good Y)
2. Using the concept of cross elasticity of demand to determine whether some products are complementary goods or substitute goods for own goods:
According to the concept of cross-price elasticity, there are two types of commodities, namely, complementary goods and substitute goods. When the cross-price elasticity of demand is greater than zero, that is positive cross-price elasticity, the two related goods are substitutes and when the cross-price elasticity of demand is less than zero, that is negative cross-price elasticity, the two related goods are complements.
Using the concept of income elasticity of demand to determine whether some products are inferior goods or normal goods for own goods:
On the other hand, according to the concept of the income elasticity of demand, goods are of three types, namely, inferior, normal, and luxury. When the income elasticity of demand for a good is negative, the good is said to be an inferior good, as the quantity demanded of the commodity decreases with an increase in the income of the consumer. On the other hand, for a normal good, the income elasticity of demand lies between 0 and 1.
References:
Dean, E., Elardo, J., Green, M., Wilson, B., & Berger, S. (2020). Price Elasticity of Demand and Supply. Principles of Economics: Scarcity and Social Provisioning (2nd Ed.).
Mankiw, N. G. (2020). Principles of economics. Cengage Learning.
