Question

Explain the differences among price elasticity, mid-point elasticity; Income and Cross Price elasticities.

Answer 1

1.

Since the elasticity of demand can be defined as the measurement of the degree of the responsiveness of the quantity demand due to the change in the price level.

Price elasticity of demand= % change in the quantity demand/ % change in the price

2.

The midpoint elasticity of demand measures the percentage change by dividing the change by the average value.

Ed=((Q2-Q1)/(Q2+Q1)/2) / ((P2-P1)/(P2+P1)/2)

The one advantage of this method of elasticity is that the same value of elasticity is obtained between two price points whether there is price rise or falls.

3.

Normal good is that good which has positive income elasticity. It means with the increase in the income, the quantity demand for the normal good increases.

On the other hand, inferior good has negative income elasticity. It means with the increase in the income, the quantity demand for the inferior good decreases.

Since income elasticity measures the effect of change in the income of the consumers on the demand for the goods.

Income elasticity of demand of X = % change in the quantity demand of good X/ % change in the Income.

4.

Cross-price elasticity of demand= % change in the quantity demand/ % change in the price

When the cross-price elasticity demand sign is positive, then both goods will be substitute goods.

The price of substitute goods and demand for its substitute goods are positively related.

When the cross-price elasticity demand sign is negative, then both goods will be complementary goods

The price of complement goods and demand for its complement goods are negatively related.