EGT1 Task 2

Topics: Supply and demand, Price elasticity of demand, Consumer theory Pages: 3 (864 words) Published: October 10, 2014
EGT1 – Task 2

Elasticity of Demand:

Price elasticity of demand is the method used to quantify how reactive consumers will be to changing prices. It is calculated by dividing the percentage change in quantity of an item demanded by the percentage change in the item price.

Elastic demand is when the percentage price increases results in a greater percentage decrease in demand or the reverse, when the percentage price decreases and results in a greater percentage increase in demand.

Conversely, inelastic demand is when the percentage price increase results in a lesser percentage decrease in demand, or the percentage price decrease results in a lesser percentage increase in demand.

On the other hand, unit elasticity is when the percentage increase or decrease in price results in an equal percentage decrease or increase in demand.

Cross Price Elasticity:

Cross price elasticity quantifies how reactive people are when purchasing one item, based on price changes of another item. It is calculated dividing the percentage change of the quantity demanded of the first item by the percentage change in the second item’s price.

One type of cross price elasticity relates to substitute goods where the consumer has the option to choose between many similar goods. In this situation the consumer will likely substitute one good for the lower priced similar product. Substitute goods are established when the cross price elasticity calculation returns a positive number

Another type of cross price elasticity relates to complementary goods. Complementary goods are when one product is used along with another. Therefore, when demand for one increases or decreases, demand for the second, complementary good correspondingly increases or decreases. Complementary goods are established when the cross price elasticity calculation returns a negative number  

Income Elasticity:

Income elasticity relates to how consumers increase or decrease their purchase of...
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