Cross-price elasticity of demand gauges the response of the demand for a good to a change in the price of another good.
Goods exchanged for one another are substitutes. For instance, if the price of Lays potato chips were to increase, the demand for Ruffles potato chips would increase because people normally see these two goods as substitutes for one another(McConnell, C. R., & Brue, S. L., Flynn, S. (2012). Compliments are goods that people tend to use in close cooperation with each other. For example, if the price of lettuce increases, the demand for radishes will decrease. This is due to the possibility that people usually use these items to make a salad.
Income elasticity of demand measures the responsiveness of the demand for a good to a change in the income of the people demanding the good, all things remaining the same. A positive income elasticity of demand, linked to normal goods; a raise in income will lead to a rise in demand. A negative income elasticity of demand, linked to inferior goods; a raise in income will lead to a fall in the demand and may lead to changes to more lavish substitutes (McConnell, C. R., & Brue, S. L., Flynn, S. (2012).
The coefficient of elasticity is the measure of elasticity. It is the percentage change in the quantity demanded divided by the percentage change in price (McConnell, C. R., & Brue, S. L., Flynn, S. (2012).
Cross-price elasticity applies when the changes made to one specific product affects the demand of another. Cross-price elasticity generally occurs with similar or substitute products.
Income elasticity helps in determining the effects that change in income would bring to the demand of a good. Increase in income leads to decrease in demanded quantity.
Elasticity of demand only deals with one good, but Cross-price elasticity deals with two commodities. Income elasticity deals with income and quantity demanded.
Changes in income govern the purchasing power of societies; they are a crucial element in market movement.
Changes in price can have direct effects on demand of a product or service. Therefore, certain types of elasticity use the price factor as the independent variable.
Other types of elasticity also gauge the relationship between market elements that do not seem to be clearly dependent. Cross-elasticity of demand shows how the demand of a product affects the change in price of another product.
The larger the number of substitute goods that are available, the greater the price elasticity of demand. The more that consumer pays for goods, in relation to their income, the larger the price elasticity of demand. Product demand is more elastic the longer the amount of is under consideration (McConnell, C. R., & Brue, S. L., Flynn, S. (2012).
A determinant for substitutes can be cereal. One cereal will be easily be substituted for another. A determinate for income, something as low priced having a five percent increase in a toothbrush may not make a difference to a consumer. On the opposite extreme, a five percent increase on the purchase of a boat may make a major impact as to whether or not to purchase the boat. When time is involved, consumers may need time to re-think their purchases. If the cost of pasta rises, then in time, a consumer may switch to rice or beans.
The availability of substitutes affects the price elasticity of demand because it gives buyers alternatives. Brand recognition affects consumers' perceptions of the substitutability of goods and so can affect the elasticity of demand (McConnell, C. R., & Brue, S. L., Flynn, S. (2012).
A consumer’s income can affect their demand for most goods, for normal goods, if the consumer a shift to the left for the demand curve, this shift a decrease. For inferior goods, an increase in income causes demand for these goods to fall, inferior goods are…