#20.4 -- Cross Elasticity and Income Elasticity of Demand (5.48)

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Chapter 20 -- Elasticity

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PowerPoint Presentation:

Video #20.4 Cross Elasticity of Demand Income Elasticity of Demand

Chapter Learning Outcomes:

Chapter Learning Outcomes Calculate the cross elasticity of demand and explain how it is used to determine substitutes, complements, and unrelated goods. Calculate the income elasticity of demand and explain how it is used to determine normal goods (both luxuries and necessities) and inferior goods.

Cross Elasticity of Demand:

Cross Elasticity of Demand The measure of the responsiveness in quantity demanded of one good to changes in the price of another good. E c = (change in Qd / Qd average) / (change in P2 / P2 average)

Cross Elasticity of Demand:

Cross Elasticity of Demand E c > 0 → Goods are substitutes E c = 0 → Goods are unrelated E c < 0 → Goods are complements Complements Substitutes

Income Elasticity of Demand:

Income Elasticity of Demand The measure of the responsiveness of quantity demanded to changes in income. Ey = (Change in Qd / Qd average) / (Change in Y / Y average)

Income Elasticity of Demand:

Income Elasticity of Demand E y > 1 Normal Good – Luxury Item 1 > E y > 0 Normal Good – Necessity Item E y = 0 Neutral Good E y < 0 Inferior Good

Chapter Learning Outcomes:

Chapter Learning Outcomes Calculate the cross elasticity of demand and explain how it is used to determine substitutes, complements, and unrelated goods. Calculate the income elasticity of demand and explain how it is used to determine normal goods (both luxuries and necessities) and inferior goods.

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