Calculate price elasticity, income elasticity, and cross elasticity of demand using relevant formulae.
TITLE
Calculate price elasticity, income elasticity, and cross elasticity of demand using relevant formulae.
ESSAY
💡Calculating Price Elasticity of Demand💡
Price elasticity of demand measures how responsive quantity demanded is to a change in price. The formula to calculate price elasticity of demand is:
\[ E_d = \frac{{\% \text{ change in quantity demanded}}}{{\% \text{ change in price}}} \]
💡Calculating Income Elasticity of Demand💡
Income elasticity of demand measures how responsive quantity demanded is to a change in income. The formula to calculate income elasticity of demand is:
\[ E_y = \frac{{\% \text{ change in quantity demanded}}}{{\% \text{ change in income}}} \]
💡Calculating Cross Elasticity of Demand💡
Cross elasticity of demand measures how responsive quantity demanded of one good is to a change in the price of another good. The formula to calculate cross elasticity of demand is:
\[ E_c = \frac{{\% \text{ change in quantity demanded of good A}}}{{\% \text{ change in price of good B}}} \]
These elasticity measures provide valuable insights into consumer behavior and market dynamics. By calculating and interpreting these elasticities, firms can make informed decisions regarding pricing strategies, product development, and understanding market relationships.
SUBJECT
ECONOMICS
PAPER
NOTES
📝 Economics Notes:
1️⃣ Price Elasticity of Demand (PED):
PED measures the responsiveness of quantity demanded to a change in price.
Formula: PED = (% Change in Quantity Demanded) / (% Change in Price)
- If PED > 1, demand is elastic.
- If PED < 1, demand is inelastic.
- If PED = 1, demand is unit elastic.
2️⃣ Income Elasticity of Demand (YED):
YED measures the responsiveness of quantity demanded to a change in income.
Formula: YED = (% Change in Quantity Demanded) / (% Change in Income)
- If YED > 0, the good is a normal good.
- If YED < 0, the good is an inferior good.
- If YED > 1, the good is a luxury good.
3️⃣ Cross Elasticity of Demand (XED):
XED measures the responsiveness of quantity demanded of one good to a change in the price of another good.
Formula: XED = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B)
- If XED > 0, the goods are substitutes.
- If XED < 0, the goods are complements.
- If XED = 0, the goods are unrelated.
4️⃣ Calculating Elasticities:
a) Price elasticity: Use the initial and final quantities demanded and prices to calculate PED.
b) Income elasticity: Use the initial and final income levels to calculate YED.
c) Cross elasticity: Use the initial and final quantities demanded and prices of both goods to calculate XED.
Remember to interpret the values of these elasticities to understand consumer behavior and market dynamics. 📊📈
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