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Price, income, and cross elasticity of demand and supply.
Elasticity is a fundamental concept in economics that measures the responsiveness of demand or supply to changes in price, income, or other factors. Understanding elasticity helps economists and policymakers analyze market behavior and make informed decisions. In this study guide, we will explore the concepts of price, income, and cross elasticity of demand and supply.
The price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. A PED greater than one indicates that a small price increase leads to a larger decrease in quantity demanded, while a PED less than one indicates that a small price increase results in a smaller decrease in quantity demanded.
The income elasticity of demand (YED) measures the responsiveness of quantity demanded to a change in consumer income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. A YED greater than one indicates that an increase in income leads to a larger increase in quantity demanded, while a YED less than one indicates that an increase in income results in a smaller increase in quantity demanded.
The cross elasticity of demand (XED) measures the responsiveness of quantity demanded for one good to a change in the price or quantity of another good. It is calculated as the percentage change in quantity demanded divided by the percentage change in the other good's price or quantity. A XED greater than zero indicates that an increase in the price or quantity of the other good leads to a decrease in quantity demanded, while a XED less than zero indicates that an increase in the price or quantity of the other good leads to an increase in quantity demanded.
The market equilibrium is determined by the intersection of the supply and demand curves. The elasticity of demand and supply at this point can affect the market equilibrium, as changes in price or income can lead to shifts in the supply and demand curves.
Elasticity is used in various applications such as tax policy, trade policies, and pricing strategies. For instance, a government may use elasticity to determine the optimal tax rate or to predict the impact of a trade agreement on domestic industries.
Elasticity has limitations in that it assumes that consumers make rational decisions and that there are no external factors affecting demand. Additionally, elasticity can be difficult to measure accurately due to the complexity of consumer behavior.
The elasticity coefficient is calculated as the percentage change in quantity demanded or supplied divided by the percentage change in price or income. The formula for calculating PED is (ΔQ/Q) / (ΔP/P), where ΔQ is the change in quantity, Q is the initial quantity, ΔP is the change in price, and P is the initial price.
The elasticity of demand and supply can vary across different markets. For instance, a market for essential goods may have a lower elasticity than a market for luxury goods, as consumers are more likely to substitute essential goods with alternatives during price changes.
What is elasticity?
What is the definition of Price Elasticity of Demand (PED)?
What can affect the price elasticity of demand for a good?
What is the definition of Income Elasticity of Demand (IED)?
What is the range for elasticity?
Elasticity is measured on a scale from _______ to _______. (2 marks)
A product with an elasticity greater than 1 is considered _______. (2 marks)
Income elasticity of demand can be positive (normal goods) or _______. (2 marks)
Discuss the importance of understanding elasticity in economics. (20 marks) (20 marks)