Microeconomics: Cross Elasticity Of Demand
Cross Elasticity of Demand
A “cross elasticity” of demand can be explained as the percentage change in the quantity demanded (%∆Q) for a good that gets affected as a 1-percent increase in the price of another good.
In Microeconomics, there is the wide study of the supply and demand side of the market; and elasticity of demand & supply further explains a part from it that is how it affects another good’s price when there is change in the quantity demanded for another good.
The cross elasticity of demand is also called as cross-price elasticity of demand. It’s basically measures the sensitivity of the demand for a good or commodity to a change in the price of the other good. It is calculated as the percentage change in demand for the first good
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PRICE ELASTICITY OF DEMAND
DEFINITION
Price elasticity of demand can be defined as
“Measures responsiveness of potential buyers to changes in price. It is the ratio of percentage change in quantity demanded in response to a percentage change in price.”
As we know price and demand have inverse relation therefore price elasticity of demand is usually a negative.
COMPUTING PRICE ELASTICITY OF DEMAND
Price elasticity of demand is computed by the economist as the percentage change in the quantity demanded divided by the percentage change in the price. That is,
Price elasticity=%change in quantity demanded/%change in price.
For example suppose that a 10 percent increase in the price of a good causes the quantity demanded of that good fall by 20 percent. We calculate your elasticity of demand as
Price elasticity of demand =20 percent/10 percent= 2.
In this example, the elasticity is 2, reflecting that the change in the quantity demanded is proportionately twice as large as the change in the
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UNIT ELATIC DEMAND
When the quantity demanded change proportionately with a change in price. In this case η=1. The demand curve will be linear. The elasticity of demand is said to be equal to unity.
2. INELASTIC DEMAND
Demand change less than proportionate to a change in price i.e. a large change in price leads to a very small change in the quantity demanded. In this case η <1 . The demand curve will be steeper. These types of goods are close to necessity.
3. PERFECTLY INELASTIC DEMAND
In perfectly inelastic demand even a large change in price fails to bring about a change in quantity demanded these type of goods are considered as necessity. In this case η=0. The demand curve will be vertical.
4. ELASTIC DEMAND
In elastic demand change is more than proportionate to a change in price. i.e. a small change in price leads to a very big change in the quantity demand. In this case η >1 . The demand curve will be flatter.
5. PERFECTLY ELASTIC DEMAND
In perfectly elastic demand a small change in price leads to an infinitely large in quantity demanded. In this case η=∞ .the demand curve will be
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