Responsiveness of demand to other factors

Income Elasticity of Demand

• A positive income elasticity of demand indicates that as income increases, demand for the good also increases.
• Income elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in income.
• A normal good is characterized by a positive income elasticity of demand, meaning demand increases as income rises.
• A good with a negative income elasticity of demand is considered an inferior good.
• An increase in income generally leads to an increase in demand for most goods.
• An inferior good is a good whose demand decreases as income increases.
• Goods with a positive income elasticity of demand are considered normal goods, indicating that demand increases as income rises.

Cross Price Elasticity of Demand

• Cross price elasticity of demand examines how the demand for one good changes in response to changes in the price of another good.
• A scenario illustrating cross price elasticity of demand could be the impact of a price decrease in generic milk on the demand for organic milk.
• A cross-price elasticity of 0.70 for organic milk indicates that a 1% increase in the price of conventional milk leads to a 0.70% increase in the demand for organic milk.
• An income elasticity of 0.27 for organic milk signifies that a 1% increase in income leads to a 0.27% increase in demand for organic milk.

Milk Market Analysis

• The income elasticity of conventional milk is -0.18, implying that a 1% increase in income leads to a 0.18% decrease in demand for conventional milk.
• The relationship between organic and conventional milk is characterized by positive cross-price elasticity, suggesting they are substitutes.
• The group consuming organic milk appears to be more affluent based on the study findings.
• The cross-price elasticity of conventional milk is -0.18, while that of organic milk is 0.70.
• Conventional milk exhibits a negative income elasticity of demand, indicating that as income rises, demand for conventional milk decreases.

Elasticity Concepts and Calculations

• The formula for calculating cross-price elasticity of demand is: (% change in quantity demanded of good A) / (% change in price of good B).
• A cross price elasticity of demand of 1.0 implies that goods are perfect substitutes. This means a 1% change in the price of one good leads to a 1% change in the quantity demanded of the other good.
• A negative cross price elasticity of demand indicates that the two goods are complements, meaning an increase in the price of one good leads to a decrease in the demand for the other good.
• When income increases but the demand for certain goods decreases, these goods are classified as inferior goods.

Elasticity of Demand and Consumer Behavior

• Income elasticity of demand measures how the demand for a good changes in response to changes in income, while price elasticity of demand focuses on the responsiveness of quantity demanded to price changes.
• A pair of goods having a positive cross price elasticity of demand are substitutes.
• When the demand for a product decreases as its price rises, this indicates that the demand for this good is relatively elastic.
• Price elasticity of demand is primarily concerned with how total revenue changes as price changes.
• An absolute value of price elasticity of demand greater than 1 signifies that demand is elastic, meaning a change in price leads to a proportionally larger change in quantity demanded.
• If the demand for one good increases by 5% when the price of another good decreases by 10%, the cross-price elasticity of demand is -0.5.
• A good with an income elasticity of demand of 2 is classified as a luxury good.
• Two goods are considered unrelated in terms of price elasticity if their cross price elasticity of demand is zero.
• A shift in the demand curve implies a change in the quantity demanded at every price level, while price elasticity of demand focuses on the responsiveness of quantity demanded to price changes along a given demand curve.
• A good with a negative income elasticity of demand and an increase in demand as income decreases is an inferior good.
• The own-price elasticity of organic milk signifies that consumers are relatively sensitive to price changes for organic milk.
• Conventional milk is characterized as a normal good with a negative income elasticity of demand.
• The cross-price elasticity of demand between organic and conventional milk indicates that they are substitute goods, meaning an increase in the price of one leads to an increase in the demand for the other.
• A cross-price elasticity of 0.18 for conventional milk implies that a 1% increase in the price of organic milk leads to a 0.18% increase in the demand for conventional milk. This indicates that organic and conventional milk are substitutes, but the substitution effect is relatively weak.
• The elasticity measures suggest that organic milk is a more price-sensitive good and a more income-sensitive good compared to conventional milk.
• Based on the elasticity estimates, consumers perceive organic milk as a premium product compared to conventional milk.
• Variations in elasticities across different studies may influence marketing strategies by suggesting target segments, pricing strategies, and product positioning for different milk types.
• An own-price elasticity of -0.87 for conventional milk suggests that the demand for conventional milk is elastic, meaning a change in price leads to a proportionally larger change in quantity demanded.
• A cross-price elasticity of 0.70 for organic milk suggests that a 1% increase in the price of conventional milk leads to a 0.70% increase in the demand for organic milk. This indicates that consumers perceive organic and conventional milk as substitutes.

Elasticity of Demand and Goods Classification

• A good with a positive income elasticity of demand is considered a normal good.
• A good that exhibits a negative income elasticity of demand is likely to be an inferior good, meaning the demand for this good decreases as income rises.
• Generally, most goods and services exhibit a positive income elasticity of demand, meaning that as income increases, the demand for these goods and services also increases.
• A negative cross-price elasticity of demand indicates that the two goods are complements, meaning they are consumed together.
• If demand rises as income rises, this suggests that the good is a normal good.
• The key difference between price elasticity of demand and income elasticity of demand is that the first focuses on the responsiveness of quantity demanded to changes in price, while the second focuses on the responsiveness of quantity demanded to changes in income.
• If a person’s income decreases and their demand for fast food increases, this suggests that fast food is an inferior good.

Calculating Elasticities

• Income elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in income: (% change in quantity demanded) / (% change in income).
• Two goods that would likely demonstrate a positive cross-price elasticity of demand include organic milk and conventional milk, as they are substitutes.
• The classification of goods as substitutes or complements is not affected by factors like brand loyalty. Instead, it is determined by the relationship between the goods and how consumers respond to price changes.
• A negative cross-price elasticity of demand indicates that two goods are complements. This means that an increase in the price of one good leads to a decrease in the demand for the other good.
• For normal goods, demand typically increases when income increases.
• The correct formula for income elasticity of demand is: (Percentage change in quantity demanded) / (Percentage change in income).
• Goods with a cross price elasticity of demand equal to zero are unrelated goods, meaning that changes in the price of one good have no effect on the demand for the other.
• A product with a negative income elasticity of demand is typically classified as an inferior good.
• The relationship between local television advertising and local radio advertising based on cross price elasticity is likely to be complementary, meaning that a decrease in the price of one would lead to an increase in the demand for the other.
• When calculating the cross price elasticity of demand, the two variables primarily examined are the percentage change in the quantity demanded of one good and the percentage change in the price of another good.
• An increase in the price of a good classified as a substitute would typically lead to an increase in the demand for the good in question.
• The relationship between price elasticity of demand and total revenue is as follows:
  • Elastic demand: a decrease in price leads to an increase in total revenue.
  • Inelastic demand: a decrease in price leads to a decrease in total revenue.
• If a good has a positive income elasticity of demand, it can be inferred that the good is a normal good, meaning the demand for this good increases as income rises.