4 What do we mean by each of the following:- Own price elasticity of demand: Cro

Question

4 What do we mean by each of the following:- Own price elasticity of demand: Cross price elasticity of demand: Incone elasticity of demand? Interpret each of the following statements: (a) Own price elasticity of demand for LCD TV is 2.9 b) Own price elasticity of demand for bread is 0.6 (c)Cross price elasticity of demand between milk and juice is 0.4 (d) Cross price elasticity of demand between milk and bread is-0.7 (e) Income elasticity of demand for LCD TV is 2.9 (f) Income elasticity of demand for cigarettes is 0.5. g)Income elasticity of demand for thrifty store clothes is -0.8

Explanation / Answer

Own price elasticity refers to the percentage change in quantity demanded of a commodity due to 1 percent change in the own price of the commodity. Cross Price elasticity refers to percentage change in quantity demanded of a commodity due to 1 percent change in price of the related good which may be substitute or a complement. Income elasticity refers to percentage change in quantity demand of a commodity due to 1 percent change in the income of the buyer.

a. The demand for LCD TV is elastic, which means that due to 1% change in own price, the quantity demanded changes by 2.9%

b. The demand for bread is inelastic, which means that due to 1% change in own price, the quantity demanded changes by 0.6%

c. The cross price elasticity fis positive between milk and juice is 0.4, which means that due to 1% change in price of related good, the quantity demanded changes by 0.4%. Also the goods are substitutes.

d. The cross price elasticity fis positive between milk and bread is -0.7, which means that due to 1% change in price of related good, the quantity demanded changes by -0.7%. Also the goods are complements.

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