Preview

Economics Elasticity Concepts

Good Essays
Open Document
Open Document
1093 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Economics Elasticity Concepts
(a) Illustrating with examples, explain the concepts of price elasticity of demand, income elasticity of demand and cross elasticity of demand.

Income elasticity of demand measures the responsiveness of demand to a change in income, ceteris paribus. It is the percentage change in demand for a good resulting from a percentage change in income, ceteris paribus. When income changes with other price or non-price factors, such as income, remaining unchanged, income elasticity of demand measures how much to which demand will change, ceteris paribus.

Income elasticity of demand that is negative refers to inferior goods which are of lower quality and are cheaper alternatives. An increase of income will result to a fall in demand of these items. As people’s incomes increase, the demand for such inferior goods will decrease as people now have the ability to purchase goods of higher quality. This will result the demand curve for the inferior goods to shift leftwards. On the other hand, the income elasticity of demand that is positive (between 0 and 1) refers to normal necessity goods. As income increases, basic necessities such as bread, will only rise a little. The demand for these items rises less than proportionately with a change in income as we have a limited need to consume additional quantities of basic or necessary goods. Therefore, the demand curve will only shift rightwards by a little. Finally, income elasticity of demand that is positive (more than 1) implies to normal luxurious goods. When income increases, the demand for luxury goods such as cars, rises more than proportionately to a change in income as consumers have the confidence and the purchasing power to buy these goods. Hence, the demand curve will shift more significantly to the right.

However, the income level of consumers is another factor which affects the income elasticity of demand. While the income elasticity of demand for basic necessities is less than 1, the income elasticity of demand

You May Also Find These Documents Helpful

  • Good Essays

    Egt Task 309.1.2-08, 09

    • 2481 Words
    • 10 Pages

    Income elasticity (Ei): A measure of the response of a consumer to a change in the income of consumers has on the quantity consumed of a good, either more or less. Most goods are considered normal goods, also called superior goods. The income elasticity of demand for normal goods is positive since the amount demanded of normal goods rises when incomes rise. Oppositely, the income elasticity of demand for inferior goods is negative because the demand for these goods falls as incomes rise. It can be calculated with the following formula:…

    • 2481 Words
    • 10 Pages
    Good Essays
  • Good Essays

    EGT1 Task 2

    • 1144 Words
    • 3 Pages

    B) Cross elasticity of demand measures two different products and their response to price changes. So if a consumer purchases one product cross elasticity measures how sensitive that consumer is to the change in the price of another product. It is measured by the percentage changes in demand for the first product that occurs in response to a percentage change in price of the second good. (McConnell, pg. 87)…

    • 1144 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Ch 5

    • 2451 Words
    • 13 Pages

    e. The larger the proportion of income spent on a good, the smaller the elasticity of demand.…

    • 2451 Words
    • 13 Pages
    Satisfactory Essays
  • Good Essays

    References: Columbia Electronic Encyclopedia, 6th Edition, 7/1/2010, p1-1, 1p. Retrieved (2011, January 11), from EBSCOhost database.…

    • 589 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    INTB 334

    • 363 Words
    • 2 Pages

    b) Discuss the concept of elasticity, with reference to the demand you derived in (a), and…

    • 363 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Demand (left) because not as many people are going to want to travel there due to the…

    • 474 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Chervon Case Study

    • 194 Words
    • 1 Page

    Sirloin steak would be considered an elastic demand. If the price increased for the steak, consumers can choose from alternate meat products to purchase at a lower price. A dozen of eggs would be an inelastic demand. Regardless, the price of eggs consumers will still purchase them. Eggs will always be in demand and produced. There are less alternatives for eggs.…

    • 194 Words
    • 1 Page
    Satisfactory Essays
  • Good Essays

    Egt1 Task 3 Essay Example

    • 1105 Words
    • 5 Pages

    3) Discuss income elasticity as it pertains to inferior goods and to normal goods (sometimes also called superior goods).…

    • 1105 Words
    • 5 Pages
    Good Essays
  • Satisfactory Essays

    Again, as the graph 1 shown below, when the income decreases, the amount of other good that low income people can afford shift down from point B to point B’. For the New York State, the demand for other goods has the same logic as the demand for food; when adding all the people’s demand for other goods together the total demand for other goods also decreases.…

    • 495 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    elasticity

    • 307 Words
    • 2 Pages

    3. Price elasticity of demand would be larger / smaller for a necessity than for a luxury. Elasticity of demand would be larger / smaller in the short run than in the long run. Elasticity of demand would be larger / smaller for Cheerios than for all cereal. Elasticity of demand would be larger / smaller for table salt than for…

    • 307 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    4. If a 20% increase in price causes a 10% drop in the quantity demanded is the price elasticity of demand elastic, unitary, or inelastic?…

    • 813 Words
    • 5 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Elasticity Dr. Sushma Shukla Adjunct Assistant Professor Economics North Virginia Community College 1 Elasticity • In economics, elasticity is the measurement of how changing one economic variable affects others. For example: i. "If I lower the price of my product, how much more will I sell? “ ii. "If I raise the price of one good, how will that affect sales of this other good? “ iii.…

    • 755 Words
    • 4 Pages
    Satisfactory Essays
  • Good Essays

    Income elasticity of demand measures the degree to which consumers respond to a change in their income by buying more or less of a particular good. In the case, the study focused on neighborhoods where income was decreasing. Even though the money people had was scarce, or having an inadequate supply of money, the people were interestingly enough buying more McDonalds than before. Many researchers teamed had up and came to a consensus that people rely more and more on inferior goods, or those good of lesser quality and generally less expensive, that normal or superior goods, which are goods that have a better quality and tend to have a higher price tag than the inferior goods. This reaction is due to the consumers’ spending limits where they can only spend a certain amount of money. The main component of spending limits is income. When a person’s income is high, that person has a large spending limit because there is flexibility and extra money to spend. To the contrary, when someone has a low income their spending limits unfortunately reduces in size, of course depending on how much of a difference there is in the incomes of the people being compared. With this being said, all of the households included in this study are in the lower class which therefore means they have a small spending limit and they have become quite reliable on…

    • 746 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Demand and supply for eggs

    • 1150 Words
    • 5 Pages

    In order to elaborate the topic, economic models/concepts such as price elasticity of demand, income elasticity of demand and cross elasticity of demand are being used. These models will give a clear explanation about how the demand has changed in different situations. However, it is required to study all factors those are affecting to demand and supply in order to obtain a clear understanding about the market.…

    • 1150 Words
    • 5 Pages
    Powerful Essays
  • Satisfactory Essays

    The demand for Californians is an elastic demand as the percentage change in quantity demanded is greater than the percentage change in price. Number of substitute products will influence this elasticity. Elastic demand means that demand for a product is sensitive to price changes. The affect that it would have on price and demand is that they would have an inverse relationship. Therefore, as the price of Californians increase, the demands for Californians decrease and vice versa.…

    • 564 Words
    • 3 Pages
    Satisfactory Essays