Question

n a minimum of 1 -2 TYPED pages please(handwritten is too hard to understand) using text as well as including examples of how to apply numerical examples of each please answer: The elasticity concepts, price, income, and cross price can all be applied to everyday purchasing of goods and services. Give specific examples of how each applies to your own purchasing of goods and services. Be sure to include examples of how to apply numerical measures of each.

Answer 1

Elasticity is the degree of responsiveness of quantity demanded due to change in the price of a good. It is calculated as the percentage change in the quantity demanded of a good due to a percentage change in the price of that give good. The elasticity of a good can take various values. An elasticity of 0 means that there is no change in the quantity of good demanded due to any change in the price. On the other hand, the elasticity of infinity means that for a small change in the price of a good, the quantity demanded changed for a large amount. When the change in the price of a good leads to an equivalent change in the demand of that good, then the elasticity of the good is said to be one. Except for those extremes, the value an elasticity of demand takes are also more than one and less than one. Intuitively, the elasticity of demand is more than one when the percentage change in the quantity demanded is more than the percentage change in the price of that good, the reverse is for elasticity less than one.

The elasticity of demand can be be classified on the following basis:

1. Price elasticity of demand

The price elasticity of demand is the degree of change in quantity demanded for a given good due to the change in the price of that given good. For the necessities, the change in quantity is not large as compared to the change in price which is why the necessities have an elasticity of demand less than 1. On the other hand, the elasticity of demand for the luxuries is more than one, which implies that for a given change in the price of the luxuries, the demand for it rises more than the change in prices. For eg, when the price of the salt increase, I would not decrease its demand because it is a necessity and I can't let go of salt in the food.

1. Income elasticity of demand

Under this, the elasticity is measured as the change in the quantity demanded of a good due to change in the income of a individual. In this, the value of elasticity takes values on the basis of the type of good. For a normal good, the quantity demanded rises with the rise in the income of the consumer, whereas for the inferior goods the quantity demanded will fall with the increase in the income of the consumer. Based on this property, the income elasticity of demand takes value greater than and less than 1 respectively. Suppose I am earning some $, with those amount I could only afford let us say 5 clothes per month, now if my income changes to twice of the previous amount, now I could afford more or say 10 of the clothes per month.

1. Cross elasticity of demand

The cross elasticity of demand is calculated on the basis of the price of the related goods. So, when the price of one good increases, the quantity demanded for another good may increase or decrease depending on its relationship with the former good.

In case, two goods are substitutes, meaning that they can be used in place of other another depending on their level of substitutability, the change in price in one of the good would lead to rise in the quantity demanded for another good which is because with the higher prices of one good, one would shift its demand to another good as both are similar.

While if the two goods are complementary, meaning that both are used simultaneously, then the elasticity behaves in a different way. Let us suppose, ther petrol and the car are complementary good, So with the increase in the prices of petrol by a high amount would lead people to decrease their quantity demand of the cars. While with the decline in the price of the petrol, more people would go for the purchase of the cars.

Numerically,

The price elasticity of demand can be calculated as= %change in quantity demand of good x/percentage change in price of good x

The income elasticity of demand is : Percentage change in quantity demanded of good x/ Percentage change in income

The cross elasticity of demand is: Percentage change in the quantity of good x demanded/ Percentage change in the price of good y