Question

Explain the concepts of cross-price elasticity of demand and income elasticity of demand. (10 points)

What do positive and negative values indicate for each of these demand elasticities?

Answer 1

1

If we talk in simple terms then cross price elasticities of demand tells the relationship between two type of goods that whether they are substitutes or complements

substitutes are those goods which can replace which other

for sample tea and coffee

compliments are those goods which complete each other for example pen and paper

now If the value of cross price elasticity of demand is positive then the two goods are substitutes each otherAnd if the value of cross price elasticity of demand is negative then the two goods are compliment to each other

2

income elsasticity of demand tells the relationship between income of the consumer and quantity he consumed

if the value of income elasticity of demand is positive then the good is normal good

if the value of income elasticity of demand is negative then the good is inferior good

Normal goods are categorised into two categories that are necessities and luxuries