ï»¿EGT1 Task 2
When we talk about elasticity, we are talking about the responsiveness of something to a stimulus. For example, season tickets and the ticket holder, elasticity in this case is driven by price. In this exercise, we will focus will be on demand side or the consumer side of elasticity.
Price elasticity of demand is figured as follows: % of the change of quantity demand over the percentage of change of price. What we want to figure out is how the consumer demand will change. Economists are most interest in how much will quantity demand fall.
There are three categories of price elasticity of demand, elastic, inelastic and unit elastic. When the price ...view middle of the document...
Economist have shown us that they are most concerned with the degree to what demand fluctuates.
The whole idea behind elasticity of demand is to understand how consumers respond to the price change of specific products.
In cross price elasticity, the equation is represent by the percent change of quantity demand of good/service Y over the percent of change of price of good/service X. Cross price elasticity measures, how responsive demand is to a change in the price of another good.
In cross price elasticity the threshold is â€œ0,â€ we are looking for the plus/minus distinction in this equation. When demonstrating an answer greater than zero the good/service is considered a substitute good and an answer, less than zero is considered a complimentary good/service. This helps us determine if goods/services are related. If we end up with an answer of exactly zero we can ascertain the products are not related. Letâ€™s look at a few examples. For instance, the price of ground beef increases by 12 percent, and the demand for ground turkey increases by 5.5%, inserting those numbers into the Cross price elasticity equation the answer would be .55, greater than one, and would indicate that the ground turkey is a substitute good. Complimentary goods would be items such as hotdogs and hotdog buns, where if the price-increase to hot dogs causes consumers demand to fall the correlation would be a decrease in the demand for hot dog buns as well.
In this element, we will discuss Income Elasticity, where the measure of how much demand for a good or service changes relative to a change in income, with all other factors remaining unchanged. When our income changes the demand, we have for certain goods will change as well.
The equation that represents income elasticity is stated as the percent change in quantity demand over the percent change in income. In this formula, the income elasticity of demand can be a positive or negative number, and it makes a very real difference to which it is. If the income elasticity of demand is negative, then the commodity is an inferior good. An inferior good is one whose demand decreases as income increases or demand increases as incomes decreases. For example, rice and potatoes are considered inferior goods. This is an unusual relationship. The opposite situation represents a normal good, normal in that you get the expected or normal relationship. For normal goods, as income increases, the goodâ€™s demand increases as well. It is what you expect and most goods; in fact, 85% of all goods are normal. Normal goods have a direct relationship between income and demand, and the income elasticity of demand is positive. As your income increases, the consumers demand for dinners at restaurants, theater tickets, cars, and maybe even asparagus increases. The opposite will occur if your income decreases.
Normal goods have a direct relationship between income and demand, and the...