# Egt Task 309.1.2-08, 09

**Topics:**Price elasticity of demand, Consumer theory, Supply and demand

**Pages:**7 (2481 words)

**Published:**July 8, 2012

1.Elasticity of demand (Ed): A measure of the response of a consumer to a change in price on the quantity demanded of a good (McConnell, Brue, & Flynn, 2012, p. 76). Determinants include substitutability of a good, proportion of a consumer's income spent on a good, the nature of the necessity of a good, and the time a purchase is under consideration. It can be calculated with the following formula:

Ed = percentage change in quantity demanded of product X

percentage change in price of product X

2.Cross-price elasticity (Exy): A measure of the response of a consumer to a change in price in one good on a change in quantity demanded of another good, either a substitute good or a complementary good. The cross-price elasticity of a substitute good is positive; conversely, the cross-price elasticity of a complementary good is negative. It can be calculated with the following formula:

Exy = percentage change in quantity demanded of product X

percentage change in price of product Y

3.Income elasticity (Ei): A measure of the response of a consumer to a change in the income of consumers has on the quantity consumed of a good, either more or less. Most goods are considered normal goods, also called superior goods. The income elasticity of demand for normal goods is positive since the amount demanded of normal goods rises when incomes rise. Oppositely, the income elasticity of demand for inferior goods is negative because the demand for these goods falls as incomes rise. It can be calculated with the following formula: Ei = percentage change in quantity demanded

percentage change in income

Task B:

1.If the elasticity of demand coefficient is zero, then the demand is perfectly inelastic. Consumers demand had no response to a change in the price of a good. When consumers respond to a change in price, the demand is elastic if the elasticity of demand coefficient is greater than one, or when the change in price of a good causes a relatively larger change in quantity demanded (e.g. a 2% decline in the price of oranges causes a 4% increase in quantity demanded, which would equal an elasticity of demand of two, using the formula, Ed = .04 / .02 = 2). If that coefficient is less than one, the demand is inelastic, or when the change in price of a good causes a relatively smaller change in quantity demanded (e.g. a 2% decline in the price of strawberries results in only a 1% increase in the quantity demanded, which would equal an elasticity of demand of 0.5, using the formula, Ed = .01 / .02 = 0.5). Unit elasticity is a special case when a change in price results in the same change in quantity demanded, resulting in an elasticity of demand of one. 2.Starbucks coffee (x) and Peet’s coffee (y) are substitute goods. An increase in the price of x would have a positive effect on the quantity demanded of y, which would also increase. This can be illustrated with a 2% increase in the price of x that results in a 6% increase in the quantity demanded of y. Therefore, using the formula, Exy = .06 / .02 = 3, the cross-price elasticity is 3. The larger the positive cross-price elasticity, the greater the substitutability of the two goods (McConnell et al., 2012, p. 88). E-books (x) and e-readers (y) are complementary goods. An increase in the price of x would have a negative effect on the quantity demanded of y, which would decline. This can be illustrated with a 5% increase in the price of x that results in a 10% decrease in the quantity demanded of y. Therefore, using the formula, Exy = .1 / .05 = 2, the cross-price elasticity is 2. The larger the negative cross-price elasticity, the greater the complementarity of the two goods (McConnell et al., 2012, p. 88). 3.Using the formula for income elasticity, normal goods are positive. So, for automobiles with an income elasticity of demand of about 3, a formula with an increase in income of 3% could be, Ei = .09 / .03 = 3 (McConnell et al., 2012, p....

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