Answer to Question #95904 in Microeconomics for SHAHADAT HOSSEN

Question

What is price elasticity of demand? Mention the determinants of price elasticity of
demand. Suppose, the cross elasticity of demand for beef with respect to chicken is E=
+1.5. (i) If price of chicken is increased by 40%, what will happen to the demand for beef?
(ii) What kind of relationship exists between beef and chicken in this case?

Answer 1

A measure of the change in demand for a given good or service caused by a change in the price of that good or service is called the price elasticity of demand.

Consider the determinants of demand elasticity.

1. substitutability (availability of substitute goods: the greater the demand for it);

2. specific gravity, the more elastic demand;

3. the demand for luxury goods, as a rule, is elastic, for necessities – inelastic.

 The decision to purchase the goods is available to the consumer, the more elastic the demand.

Cross price elasticity of demand characterizes the relative change in the volume of demand for one product when the price of another changes.

If cross elasticity of demand for beef with respect to chicken is E=+1.5. (i) If price of chicken is increased by 40%, then demand for beef will be more at 110%.$e_(i/ii)=(∆Q_i/Q_i)/(∆p_ii/p_ii )$

$1,5= (∆Q_i/Q_i)/1,4 (∆Q_i)/Q_i =1,5∙1,4 (∆Q_i)/Q_i ≈2,1$

$(2,1-1)*100$ %=110%

These products are interchangeable.