Elasticity of demand

Elasticity of demand is the responsiveness measure in the demanded quantity for a good as a result of price change of that given good. It is the percentage change in the quantity a good demanded divided by the percentage change in the price of that good. It gives the percentage demand change that a person might expect as a consequence of one price change. Suppose the quotient less than one, then it is referred to as inelastic; one, unit elastic and greater than one, elastic. When the quotient is infinite, then it is called perfect elastic but when price elasticity is zero then referred to as perfect inelastic (Caldwell, 2003).

Cross-price elasticity

It is the measure of rate of response of demanded quantity for a commodity, as a result of price change of another good. Suppose two commodities are substitutes, it is expected that the consumers will buy more of one good if the substitute’s price rises. On the other hand, suppose the two commodities are complements, rise of price in one commodity should cause fall of demand for both goods. It is the quantity of one commodity divided by the percentage change in price of another good (Kowalski, 2005).

Income elasticity

It is the measure of relationship amid change in demanded quantity for a good and real income change. The percentage change in the quantity demanded of one good divided by the percentage change in buyer’s income. Normal goods are goods in which the demand increases with price increase and decreases for price decrease. For normal goods, price and demanded quantity are directly related. Examples are buying cars, luxuries etc. Demand for inferior goods decreases when the income increases and increases when demand decrease (negatively related). Example is bicycle, when income increases people would tend to buy vehicles and abandon bicycle (Kowalski, 2005).