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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. Letís 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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