经济代写|宏观经济学代写Macroeconomics代考|The Cross-Price Elasticity of Demand

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经济代写|宏观经济学代写Macroeconomics代考|The Cross-Price Elasticity of Demand

The price of a good is not the only factor that affects the quantity consumers will purchase. Sometimes the quantity of one good demanded is affected by the price of a related good. For example, if the price of potato chips falls, what is the impact, if any, on the demand for soda (a complement)? Or if the price of soda increases, to what degree will the demand for iced tea (a substitute) be affected? The cross-price elasticity of demand measures both the direction and magnitude of the impact that a price change for one good will have on the demand for another good. Specifically, the cross-price elasticity of demand is defined as the percentage change in the demand of one good $(\operatorname{good} \mathrm{A})$ divided by the percentage change in price of another $\operatorname{good}(\operatorname{good} B)$, or
$$\text { Cross-price elasticity demand }=\frac{\% \Delta \text { in the demand for Good A }}{\% \Delta \text { in the price for Good B }}$$
The cross-price elasticity of demand indicates not only the degree of the connection between the two variables but also whether the goods in question are substitutes or complements for one another.
Calculating the Cross-Price Elasticity of Demand
Let’s calculate the cross-price elasticity of demand between soda and iced tea, where a 10 percent increase in the price of soda results in a 20 percent increase in the demand for iced tea. In this case, the cross-price elasticity of demand would be $+2(+20 \% \div+10 \%=+2)$.
Consumers responded to the soda price increase by buying less soda (moving along the demand curve for soda) and increasing the demand for iced tea (shifting the demand curve for iced tea). In general, if the cross-price elasticity is positive, we can conclude that the two goods are substitutes because the price of one good and the demand for the other move in the same direction.

As another example, let’s calculate the cross-price elasticity of demand between potato chips and soda, where a 10 percent decrease in the price of potato chips results in a 30 percent increase in the demand for soda. In this case, the cross-price elasticity of demand is $-3(+30 \% \div-10 \%=-3)$. The demand for chips increases as a result of the price decrease, as consumers then purchase additional soda to wash down those extra bags of salty chips. Potato chips and soda, then, are complements. In general, if the cross-price elasticity is negative, we can conclude that the two goods are complements because the price of one good and the demand for the other move in opposite directions.

经济代写|宏观经济学代写Macroeconomics代考|Cross-Price Elasticity and Sodas

According to economist Jean-Pierre Dube, Coca-Cola is a good substitute for Pepsi-the cross-price elasticity is a 0.34 . In other words, a 10 percent increase in the price of a Pepsi 12-pack will lead to an increase in the sales of Coca-Cola 12 -packs by 3.4 percent. But six-packs of Coca-Cola and Diet Coke are an even better substitute-with a cross-price elasticity of 1.15 ; a 10 percent increase in the price of a six-pack of Diet Coke will lead to a 11.5 percent increase in the sales of six-packs of Coca-Cola. And a 10 percent increase in the price of a 12-pack of Mountain Dew will lead to a 7.7 percent increase in the sales of 12 -packs of Pepsi.
The Income Elasticity of Demand
Sometimes it is useful to measure how responsive demand is to a change in income. The income elasticity of demand is a measure of the relationship between a relative change in income and the consequent relative change in demand, ceteris paribus. The income elasticity of demand coefficient not only expresses the degree of the connection between the two variables, but it also indicates whether the good in question is normal or inferior. Specifically, the income elasticity of demand is defined as the percentage change in the demand divided by the percentage change in income, or
$$\text { Income elasticity of demand }=\frac{\% \Delta \text { in demand }}{\% \Delta \text { in income }}$$
Calculating the Income Elasticity of Demand
Let’s calculate the income elasticity of demand for lobster, where a 10 percent increase in income results in a 15 percent increase in the demand for lobster. In this case, the income elasticity of demand is $+1.5(+15 \% \div+10 \%=+1.5)$. Lobster, then, is a normal good because an increase in income results in an increase in demand. In general, if the income elasticity is positive, then the good in question is a normal good because income and demand move in the same direction.

In comparison, let’s calculate the income elasticity of demand for beans, where a 10 percent increase in income results in a 15 percent decrease in the demand for beans. In this case, the income elasticity of demand is $-1.5(-15 \% \div+10 \%=-1.5)$. In this example, then, beans are an inferior good because an increase in income results in a decrease in the demand for beans. If the income elasticity is negative, then the good in question is an inferior good because the change in income and the change in demand move in opposite directions.

宏观经济学代考

经济代写|宏观经济学代写Macroeconomics代考|The Cross-Price Elasticity of Demand

$$\text { Cross-price elasticity demand }=\frac{\% \Delta \text { in the demand for Good A }}{\% \Delta \text { in the price for Good B }}$$

经济代写|宏观经济学代写Macroeconomics代考|Cross-Price Elasticity and Sodas

$$\text { Income elasticity of demand }=\frac{\% \Delta \text { in demand }}{\% \Delta \text { in income }}$$

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