Q. What is Elasticity and Cross Price Elasticity of Demand?

Answer

What is Elasticity?

Price elasticity of demand measures a consumer’s responsiveness to changes in price.

Price elasticity of demand = % Change in Quantity Demanded / % Change in price.

 

There are three different types of elasticity of demand to include elastic, inelastic, and unitarily elastic.

  • A good or service that is elastic would be defined as a price elasticity of demand that is greater than 1. Goods and services that are elastic in demand tend to be luxury goods such as video consoles, video games, concert tickets, and live sporting events.
  • Whereas goods and service that are inelastic in demand would be defined as a price elasticity of demand that is less than 1. Goods and services that are inelastic in demand tend to be necessity goods, for example, internet, laptop computer, printer, office supplies, utilities, and prescription medication.
  • Goods and services that are unitarily elastic in demand are defined as a price elasticity of demand that is equal to 1, meaning that a 10% increase in price will lead to a 10% decrease in quantity demanded. Examples of unitarily elastic goods and services would include meat in the summer to BBQ and/or turkey, ham, and prime rib during the holiday seasons. Keep in mind that the absolute value is used to demonstrate the proportional changes between quantity demanded and price unless otherwise specified.

 

What is Cross Price Elasticity of Demand?

              Cross price elasticity of demand is used to determine whether two goods and/or services are substitutes and/or complementary goods and services.

Cross price elasticity of demand = % change in quantity demanded for Good A / % change in the price of Good B.

 

If cross price elasticity of demand is a positive value, the two goods or services would be substitutes. Whereas, if the cross-price elasticity of demand is a negative value, the two goods or services would be complementary goods or services. The absolute value is not used to demonstrate the proportional changes between the quantity demanded of Good A and the price of Good B. Examples of substitutes would be Coca-Cola and PepsiCo, and complementary goods would include hotdogs and hotdog buns.

 

  • Last Updated Mar 09, 2021
  • Views 1411
  • Answered By Suzanne Schriefer, Education & General Education Librarian

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