EGT 1 Task 2
A. Define the following three terms:
1. Elasticity of demand
The responsiveness or sensitivity of consumers to changes in pricing of products is measured with elasticity of demand. The more reactive consumers are to a price change, the more elastic or simply elastic a product is considered. The less reactive consumers are the less elastic or inelastic the product is (McConnnell,Brue 2011).
2. Cross-price elasticity (include substitutes and complements)
The change in demand in one product caused by a price change in another good is called cross price elasticity. The change in the price of one product or goods that causes a change in the demand for another product is ...view middle of the document...
An example is Progresso brand soup, when Progresso price increases, its demand decreases then Chunky brand soups demand will increase in response.
Independent goods are unaffected by change in price of other unrelated goods.
The equation for cross price elasticity is Exy=%change in quantity demanded of product x/% change in price of product y
3. Income elasticity (include normal and inferior goods)
Income elasticity is a way to measure change in demand for products with relation to change in consumer income and is a way to classify goods as inferior or normal. Inferior goods and income move in opposite directions along the demand curve where normal goods move in the same direction as consumer income (McConnnell,Brue 2011).
In the case of normal goods income elasticity is positive and more of them are demanded as consumer income increases or less is demanded and consumer income decreases. These are generally non-essential goods or luxuries.
With inferior goods the coefficient is negative therefore as consumer income increases demand decreases and when income decreases demand increases. Things like bulk foods and bus travel fall into this category.
B. Explain the elasticity coefficients for each of the three terms defined in part A.
Measuring the ratio of percent change in quantity demanded to percent change in price, the resulting ratio is an elasticity coefficient. The value of the elasticity coefficient tells us whether demand is elastic or inelastic. If demand is elastic, then a change in price causes a proportionally larger change in quantity demanded. If demand is inelastic, then a change in price causes a proportionally smaller change in quantity demanded. If demand is unitary elastic,...