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Cross Elasticity Of Demand, Income Elasticity of Demand

Cross Elasticity of Demand, Income Elasticity of Demand

Cross Elasticity of Demand
The relation amidst percentage change in quantity to percentage change in price of a related commodity is termed as cross elasticity of demand. J.S.Sloman, defines as "Cross elasticity of demand refers to the responsiveness of demand for one good to a change in the price of another." The cross elasticity of demand amidst two commodities X and Y is denoted as Eyx = Percentage change in quantity y / Percentage change in price x.

= [(Δqy / qy) / (Δpx / px)] = (Δqy / qy) x (px / Δpx) = (Δqy / Δpx) x (px / qy)

Cross Elasticity of Substitutes and Complementary Commodities

In the case of substitutes, the cross elasticity is positive and huge. The higher the co-efficient, the enhanced substitutes the articles are. If the price of tea increases, the demand for coffee increases and vice versa. This is called cross substitutes elasticity of demand. In the case of Complementary commodities, the cross elasticity is in the case of mutually related goods such as bikes and petrol. When the prices of bikes hikes the demand for petrol drops and vice versa.

Income Elasticity of Demand

This notion of income elasticity of demand articulates the approachability of customer's demand for any article to the change in his earnings. It may be denoted as "the ratio of percentage change in the quantity demanded of a commodity to the percentage change in income." Lipsey defines as " The responsiveness of demand for a product to changes in income is termed income elasticity of demand." Thus it is denoted as follows: Ep = Percentage change in demand in quantity / Percentage change in income

= (ΔQ / Q) / (ΔY / Y) = (ΔQ / Q) x (Y / ΔY) = (ΔQ / ΔY) x (Y / Q)

Measuring Income Elasticity of Demand

To measure income elasticity of demand, certain determinants are there to be considered. They are as under.
  • Natures of Commodity - There are certain aspects which decide the income elasticity and they are necessities, comforts and luxuries.

  • Income Level - The category of certain goods depends upon the level of income. For instance, Purchase of four wheelers may be requirement in a posh country whereas luxury in underdeveloped countries.

  • Time Period - With the change in the time frame, a luxury of today may be become requirement of tomorrow.

  • Demonstration Effect - Based on effective demonstrations such as expressing, displaying and exhibiting goods, the likings and fondness of customers changes which ultimately brings about change in the income elasticity of demand for a variety of goods.

  • Frequency of Increase in income - Based on the increase or decrease in the income frequency, the income elasticity of demand varies and based on which tendencies of purchasing luxury goods is determined.
Importance of Price Elasticity Notion

This concept has huge practical significance in devising and comprehending several economic policies and complexities. Some of them are: the determination of the following - monopoly price, price under discriminating policy, prices of public utilities, price of joint products, wages and promotional elasticity. It has also significance in the following - in government policies, public utilities, paradox of poverty in the midst of abundance, finance ministry, difficulties of overseas trade, proceeds from such trades, tariff policy and devaluation.

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