Egt1

In: Business and Management

Submitted By stalyun22
Words 2372
Pages 10
A. Define the terms.
1. Elasticity of demand measures the change in the quantity demanded due to the price changes in the market. This can also be characterized as a change in percentage to both the quantity demanded and the price. Durable items, such as appliances or automobiles, show elasticity of demand because these products can be bought infrequently and are not a consumer necessity. These durables can be purchased at leisure or when the prices are low. Elasticity of demand is measured by the number of substitutes available, the degree of necessity, and the price of a good as a proportion of income.
Cross-price elasticity is a measure between the price changes or demand for one good affects the change in the price of another good. When the cross-price elasticity is negative, goods are referred to as complements. If there is an increase in price of a good that results in the decrease of the quantity demanded of another product, then both products are considered to be complements of each other. When the cross-price elasticity is positive, goods are called substitutes. If there is an increase in the price of one product that results in the increase of the quantity demanded of another product, then both products are seen as substitutes. Because of cross-price elasticity, goods that compete with one another are often paired together in the market (economics.about.com).
Income elasticity measures the change between the quantity of a good demanded and a change in income. Income elasticity is the direct relationship between income and demand. This is further characterized as a percentage change of the demand because of a percentage change in the buyers’ income. Income elasticity also depends on whether or not a good is considered a luxury or a necessity. Income elasticity that is positive creates a normal good. Normal goods are those that increase in consumption as…...

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