Cross Elasticity and Income Elasticity of DemandThis is a featured page

Cross Elasticity of Demand:Cross Elasticity and Income Elasticity of Demand - Welker's Wikinomics Page
This measures how sensitive consumer purchases of one product (X) are to a change in the price of some other product (Y)


Substitute Goods
  • Cross elasticity of demand is positive if the sales of product X moves in the same direction as a change in the price of product Y
  • larger positive cross-elasticity coefficient = greater substitutability between the two products
Complementary Goods
  • Cross elasticity is negative: increase in price of product X decreases the demand for product Y
  • Larger negative cross-elasticity coefficient = greater complementarity between the two goods
Independent Goods
  • Zero/near-zero cross elasticity = two products are unrelated
  • A change in one product's price has no effect on the other product's demand
Application
  • A product's substitutability, measured by the cross-elasticity coefficient, is important in businesses and government because the demand for their products is directly affected by the price of other products.


Income Elasticity of Demand:Cross Elasticity and Income Elasticity of Demand - Welker's Wikinomics Page
Remember: income is a determinant of demand!

This measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good.


Inferior Goods
  • A negative income-elasticity coefficient represents an inferior good (Ex. retread tires, cabbage, used clothing).
  • A negative coefficient means that the income and quantity demanded move in opposite directions. i.e. as the income increases, the demand for the good decreases meaning it is inferior

Normal Goods
  • A positive income-elasticity coefficient represents a normal good; income and quantity demanded move in same direction
Insights
  • Coefficients of income elasticity of demand provide insights into the economy and helps explains why events are happening in the economy.



welkerjason
welkerjason
Latest page update: made by welkerjason , Mar 12 2008, 5:47 AM EDT (about this update About This Update welkerjason Edited by welkerjason


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