How are the cross elasticity of demand and income elasticity of demand similar and how are they different from the price elasticity of demand?
What will be an ideal response?
The cross and income elasticities are similar to the price elasticity of demand because all examine how strongly demanders respond to a change in a relevant factor. The price elasticity of demand examines how strongly demanders respond to a change in the price of the product. The cross elasticity of demand studies how strongly demanders respond to a change in the price of a related product. And the income elasticity of demand examines how strongly demanders respond to a change in income. The formulas for all three elasticities also are similar. All three use percentage changes and all three divide the percentage change in the quantity demanded of the good by the percentage change in the relevant factor.
The elasticities also differ. For instance, as outlined above, all three concentrate on a different factor: the good's price (for the price elasticity of demand); the price of a related good (for the cross elasticity of demand); and income (for the income elasticity of demand.) The price elasticity of demand is always positive (because we use the magnitudes of the percentage changes or, equivalently, we take the absolute value of the percentage changes) whereas the cross and income elasticities of demand can be either positive or negative.
You might also like to view...
The short-run aggregate supply line is:
A. upward sloping. B. downward sloping. C. horizontal at the current rate of inflation. D. vertical at the economy's potential output.
Assume that coffee and tea are substitutes. Given a downward sloping demand curve for tea, an increase in the price of tea will cause
A) an increase in the demand for coffee. B) a decrease in the demand for coffee. C) a leftward shift of the demand curve for tea. D) a leftward shift in the demand for coffee.
Nonexcludable goods tend to be undersupplied because:
A. the free rider problem persists. B. people do not pay the true value of the good. C. people rarely willingly pay for something they could get for free, regardless of how much they value it. D. All of these statements are true.
Which of the following was sanctioned by the Zimbabwe government in January 2009 as a substitute currency?
a. Japanese yen b. Chinese yuan c. Mexican peso d. U.S. dollars e. Argentine peso