Price, Income, and Cross Elasticity of Demand

ELASTICITIES OF DEMAND
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Elasticity of Demand
Introduction
Elasticity measures responsiveness of one variable such as income to changes in another variable such as price (Taylor, Greenlaw and Dodge, 2014:118). For instance, price elasticity of demand measures the responsiveness of the demand for one good to a change in the price of another good (Mankiw and Taylor, 2020:53). This essay focuses on the price elasticity of demand, income elasticity of demand, and cross elasticity of demand and highlights real-world examples of different types of elasticity.
Price elasticity of demand
Price elasticity of demand is “a measure of how much the quantity demanded of a good response to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price” (Mankiw and Taylor, 2020:53). The elasticity of demand can be elastic or elastic. Elastic demand represents changes in proportion to the phenomenon causing the change (Taylor, Greenlaw and Dodge, 2014: 109). With inelastic demand, demand varies disproportionately with the phenomenon causing the change. In the case of elastic demand, elasticity is greater than one, and a 10% increase in price leads to more than a 10% decrease in quantity demanded, as reflected in figure 1. PED> 1 represents elastic demand while PED=represents unit elastic demand and PED <1is inelastic demand.
Figure 1: Elastic and inelastic demand
Source: Taylor, Greenlaw and Dodge, 2014:118)
One of the uses of price elasticity of demand is pricing strategies to increase total revenue, including reducing in prices in markets with elastic demand (Gillespie, 2019: 50). An LG washing machine is an example of a product with has elastic demand as it is purchased infrequently and consumer can postpone buying them if the price is high. In competitive markets, prices, quality, or performance help differentiate products or services (Sloman and Garratt, 2018:131) Another use of price elasticity of demand is price discrimination strategy, where different prices are charged to different target markets, such as the electricity market. Consumers in the inelastic electricity submarkets would be charged higher prices, and there would be a lower decrease in demand than in the elastic markets.
Income elasticity of demand
Sloman and Garratt (2018:57) defined income elasticity of demand as the “responsiveness of demand to a change in consumer incomes.” There is an inverse relationship between changes in income and the demand for inferior goods (Sloman and Garratt, 2018: 32, 58). Normal goods are goods whose demand rises as consumer income rises, and for an inferior good that the demand increases as income decrease or demand falls as income rises (Taylor, Greenlaw and Dodge, 2014: 123) Figure 2 income elasticity of demand and in D3 there is an increase in income and decrease demand for inferior goods. In D1 and D 2 ( necessities and luxuries) there is increased income and demand for normal goods In a normal good an increase in demand for commodities is associated with increasing consumer income and vice versa (Mankiw and Taylor, 2...