Demand, Supply, Market Equilibrium and Elasticity
Elasticity of demand is shown when the demands for a service or goods vary according to the price. Cross-price elasticity is shown by a change in the demand for an item relative to the change in the price of another. For substitutes, when there is a price increase of an item, there is an increase in the demand for another item. When viewing complements, if there is an increase in the price of an item, the demand for another item decreases. Income elasticity is shown when there is a change in the demand for a good relative to a change in income. This concept is shown in how people will change their spending habits when their income levels change. For example, the demand for basic food items does not increase regardless of income level, but the demand for restaurant dining increases as the income grows. According to McConnell (p.88), inferior goods are goods that are no longer in high demand as consumers’ income rise. Normal goods are goods whose demand increases when consumers’ incomes increase. Normal goods’ demand also decreases when consumers’ income decrease.
Elasticity of Demand is shown when there is a percentage change in the quantity demanded to the percentage change in the price. When the coefficient is greater than 1, the demand is elastic. When the coefficient is less than 1, the demand is inelastic. When the coefficient is equal to 1, the demand is of unit-elasticity. Cross-price elasticity is demonstrated when there is a percentage change in the demand for one good relative to a percentage change in the price of another good. When the coefficient of cross-elasticity is positive, the two products are positive; when negative, the products are complements. (McConnell, p.89) Income elasticity is the demand to changes in income due to a percentage change in income. Normal goods are indicated by positive coefficients, while inferior goods are...
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McConnell, C., Brue, S., Flynn, S. (2012) Economics (19th ed.). New York, NY: McGraw-Hill.
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