Price elasticity of demand
Price elasticity of demand gives information on the degree with which changes in the price of a commodity affect the quantity demanded of a commodity, holding other factors affecting demand constant (Bade and Parkin 89).
Income elasticity of demand
Income elasticity of demand measures the sensitivity of changes in quantity demanded of goods and services to change in real income of the people consuming the goods and services, holding other factors constant. For a normal good, the income elasticity of demand is positive. An example is a car.
Commodity Y is a normal good because an increase in income as represented by a shift from BC1 to BC2 leads to an increase in quantity purchased from Y1 to Y2.
In the case of an inferior good, the quantity demanded declines as income increases. This results in a negative income elasticity. An example is the use of public transport. Commodity X is an inferior good because an increase in income leads to a decline in quantity purchased from X1 to X2 (Mankiw 209).
Cross price elasticity of demand
Cross price elasticity focuses on the relationship between the two commodities. This type of elasticity gives information on the extent by which a change in price of one commodity affects the change in demand for another commodity. From a mathematical point of view, this elasticity is calculated through the division of percentage change in one commodity by percentage change in another commodity. Two commodities can either substitute or complement each other. If the price elasticity is less than zero (negative), it implies that the two commodities are complementary goods. Examples are rice and beef. Further, if the price elasticity is greater than zero (positive), it implies that the two commodities are substitutes. Examples are butter and margarine (Moon 91).
The first factor that affects the price elasticity of demand is the availability of substitutes. Elasticity tends to be greater when a commodity has numerous substitutes. The second factor is the time period being considered. A short time period results in a low elasticity. The third factor is the nature of a commodity. The final factor is the income level. For instance, demand for the higher income group tends to be inelastic (McEachern 141).
Marginal revenue represents the extra revenue that is generated from the sale of an extra unit of a commodity. The value of marginal revenue is arrived at through the division of change in total revenue by a change in output. Marginal revenue obeys the law of diminishing returns. This law holds that the marginal revenue will ultimately slow down as the level of output rises (Arnold 46).
- (600-300) / (10-11) * (10+11) / (600+300)
300 / -1 * 10.5 / 450
= -7
- (2100 – 1500) / (5 – 7) * (5 + 7) / (2100 + 1500)
-300 * 12 / 3600
= -1
- (2700 – 2100) / (3 – 5) * (3 + 5) / (2700 + 2100)
-300 * 8 / 4800
= -0.5.
Works Cited
Anderton, Alain. Economics, UK: Pearson Education Inc., 2008. Print.
Arnold, Roger. Economics, USA: South-Western Cengage Learning, 2008. Print.
Bade, Robin and Michael Parkin. Essential foundations of economics, USA: Pearson Education, 2013. Print.
Mankiw, Gregory. Principles of economics, USA: South-Western Cengage Learning, 2011. Print.
McEachern, William. Economics: a contemporary introduction, USA: Cengage Learning, 2011. Print.
Moon, Mark. Demand and supply integration: The key to world-class demand forecasting, USA: Pearson Education Inc., 2013. Print.