Question

Explain the concepts of own-price elasticity, cross-price elasticity and income elasticity of demand. State the factors that determine own-price elasticity of demand for a normal good

Answer 1

Price elasticity of demand is the relationship between price and quantity demanded

It is given by the ratio of percentage change of quantity demanded to the percentage change in the price

It generally tellss that whether the good is a elastic, in elastic or unitelastic

Cross price elasticity of demand tells the relationship between two type of foods that whether they are complements or substitutes to each other

Complements are those which complete each other

For example pen and paper

Substitutes are those good which can replace each other

For example tea and coffee

If the value of cross price elasticity of demand is positive then the two goods are substitutes to each other

If the value of cross price elasticity of demand is negative then the two goods are complements to each other

Income elasticity of demand gives the relationship between income level of a consumer and the quantity he or she consumed

Income elasticity of demand is given as the ratio of percentage change of quantity demanded to the percentage change in the income of the consumer

It tells that whether the two goods are normal good or inferior goods

For normal good, the value of income elasticity of demand is positive

Inferior goods are those good in which as the income rises the quantity demanded by the consumer decreases

Some of the factors that affect the price elasticity of demand are-

1. Income level of consumers
2. Timeperiod
3. Nature of commodity
4. Presence of substitutes order complements in the market
5. Number of consumers of the users in the market