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(B) Income elasticity: Demand is a function, besides
price (P) also of the income (Y) of an individual. However, income
and demand hold a direct relationship, such that Y and Q rise or
fall together. Hence the sign of elasticity ratio in this case is
normally positive. Let’s illustrate this :
Assume that the values of Y and Q are as follows :
Y1 = 100 Q1 = 16
Y2 = 120 Q2 = 18
In this case the value of income elasticity ey will
be:
(C) Cross Elasticity: The price elasticity of
demand that we have studied so far is also called the "own elasticity."
This is because we have determined the elasticity for good A with the
change in the price of the same good. However, various goods A, B, C etc.
hold a mutual relationship. As such if we attempt to find the elasticity
of demand for good B whenever the price of good A changes, then it is
called a cross elasticity ratio. However, the goods A and B may hold either
of the following relationships:
i) Substitutes : as in case of tea and
coffee or different brands of toothpaste, television sets etc. These goods
are symbolized as BS which implies that B is a substitute of
A. In this case, whenever the price of A rises the demand for A will fall
but that of B will rise. Therefore the relation between PA and
QB is direct. Hence the sign of elasticity ratio will
be positive. This can be illustrated as:
PA QA QBS
10 8 8
12 6 10
ii) Complementary goods: Consider two complementary,
good A - a vehicle and B - gasoline. In this case, with a rise in the
price of A the demand for A (QA) will fall and similarly, the
demand for B(QBC) will also fall. The sign of elasticity
ratio will then be negative in sign. This can be illustrated as
follows:
PA QA QBC
5000 100 40
6000 80 35
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Index
2.
1 Fundamental Concepts
2. 2 Demand Schedule, Function and Law
2. 3 Supply Schedule, Function and Law
2. 4 Elasticity of Demand and Supply
2. 5 The Concept of Equilibrium
Chapter 3
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