Answer to Question #301597 in Microeconomics for Plura

Question

The price elasticity of demand is -0.9.  The income elasticity of demand is 0.5.  The cross-price elasticity of demand between your good and a related good is 2.0. What can you determine about consumer demand for your product from this information

Answer 1

The price elasticity of demand can be used to determine the movement in quantity demanded versus a shift in the price. It denotes how flexible consumers are about their purchase based on how consumers respond to a price change. The price elasticity of demand of this good is –0.9, making the shift in price, the denominator, greater than the movement in demand, the numerator since the value is not a whole number. Consumers are very flexible about the price of this good. Consumer demand for this good changes less than the price because the price elasticity of demand is inelastic.

Income elasticity of demand represents how much a shift in income affects moves quantity demanded to determine if the good is a luxury, necessity, normal, or inferior. The income elasticity of demand for this good is 0.5. The movement in demand, the numerator, is less than the shift in income, the denominator because the value is not a whole number. Consumer demand for this goodwill increase when income increases because this good is a necessity. Also, the consumer demand for this goodwill decrease if income decreases because this good is a necessity.

The cross-price elasticity of demand represents how a movement in the quantity demanded of one good is affected by the shift in the price of another good. This determines if the goods are substitutes or complements. The cross-price elasticity of demand for this good is 2.0, meaning that these two goods are substitutes. The value is positive because consumers want to buy one good or the other and not both. Consumer demand for this goodwill rise if the price rises for the other good and falls if the price lowers for the other good.