University:
Lancaster University
Course:
ECON100 | Principle of Economics
Academic year:

2024
Views:

403

Pages:

2
Author:

Chloe T.

Income and Cross price elasticity of demand in economy Income elasticity of demand Price elasticities of demand refer to the strength of the change in the quantity demanded (Qd) of a commodity on account of a change in consumers’ incomes. Income elastic or change in price refers to the change in demand among the products in response to a singular change in price. Formula In this regard, the formula for the wage elasticity of the demand is put forth as: Elasticity of wage demand = the change in Q^d percentage/change in wage percentage Normal and Inferior goods That is why demand for goods or services typically increases when higher wages exist for them, they are regarded as Normal Goods. Therefore, for such Normal Goods, wage elasticity of demand is always positive because the level of income and demand move in the same direction. Utilizing the formula for painting the wage elasticity of demand, one is likely to realize that an increase in wages is likely to result into an increase in demand, in other words positive concerning positive. It follows that for ordinary goods, the directional movement of the wage elasticity of demand is positive and falls somewhere above zero. It increases at the rate of response to a change in income, while it also increases at the rate of response to changes in demand. Nevertheless, there are certain items and services for which an increase in income may lead to a decrease in demand such goods and services are referred to as inferior goods. Examples of inferior Secomnd goods include second-hand cars, staple diets (corn and/or potatoes, rice and so on). Thus for second inferior goods, the wage elasticity of demand is negative and less than zero. Cross price elasticity of demand The cross-price elasticity of request measures the extent to which the demand for a single good changes with the cost of another good. The cross-price elasticity of request is measured as the percentage in quantity of an item x demanded as a result of one percent change in costs of another item v. Equation Cross-price elasticity of demand = percent change in Q^d for good 1/percent change in price of good 2 The equation for this meaning is enclosed as follows. Cross-price elasticity of demand=Coefficient is taken as a ratio of demand shifts of 1 when the price of good 2 alter. Coefficient is adverse. Substituting and complementary goods Where goods are similar and services are offered, cross price elasticity is likely to be above zero. For example, when the price of beef increases, people purchase more chicken. This is because beef and chicken are close alternatives. In case of goods that are considered complementary to each other, the relation between price and quantity demanded is negative. For instance, an increase in the cost of coffee decreases the consumption of cream. Coffee and cream are complements.