Question

Distinguish the following and identify each with the appropriate formula; a. Price elasticity of demand b. Cross price elasticity of demand c. income elasticity of demand d. Why is elasticity of demand higher along a linear demand curve?

Answer 1

a) Price elasticity of demand is the responsiveness of the quantity demanded of a good to a change in the price of the good.

Price elasticity of demand = (% change in quantity demanded / % change in price)

b) Cross price elasticity of demand is the responsiveness of the quantity demanded of one good to a change in the price of another good.

Cross price elasticity of demand = (% change in quantity demanded of a good / % change in price of another good)

c) Income elasticity of demand is the responsiveness of the quantity demanded of a good to a change in the income.

Income elasticity of demand = (% change in quantity demanded / % change in income)

d) In a linear demand curve , the slope of the demand curve is constant but this is not the case for elasticity of demand. At a higher price , the quantity demanded is low. So when there is decrease in price, the percentage decrease in price is very less whereas the percentage increase in quantity demanded is very high. So, at this point the elasticity of demand is very high. Whereas, when the price is low , the quantity demanded is very high.So when there is decrease in price, the percentage decrease in price is very high whereas the percentage increase in quantity demanded is very low. So, at this point the elasticity of demand is very low.