Eco Bus 2 - Essay Example

Income elasticity is a measurement of the rate over time of a change in quantity demanded because of a positive or negative change consumer income. As consumer income rises, if a good decreases in demand, it is an “inferior good”; if demand for a good rises proportionally to increases in consumer income, it is a “normal good.” 1. The elasticity of demand coefficient expresses how sensitive consumers are to changes in price. To avoid ambiguity, the coefficient of the elasticity of demand is expressed in an absolute value.

While a zero quantity expresses perfect inelasticity (that is, quantity demanded is unaffected by changes in price), any value in between zero and one will represent relative inelasticity. A value that is greater than one will represent a relatively elastic demand, up until a value of infinity, which represents a perfectly elastic demand (that is, quantity demanded is infinitely changed by changes in price. An elasticity coefficient equal to negative one indicates unit-elastic demand, which is a situation that occurs when the percentage change in quantity demanded is equal to the percentage change in price. 2. The cross-price elasticity coefficient expresses how sensitive demand is to a price change of other related goods.

Elasticity coefficients above zero indicate that there is a high inverse correlation between the prices of Good A and Good B, which means that the goods are substitutes. In contrast, coefficients below zero indicate direct correlations between the prices, which means those goods are complements. Small absolute values of the cross-price elasticity coefficient indicate that there is little or no relation between the prices. 3. The income elasticity coefficient expresses how sensitive demand for a good is to income change.

Income elasticity coefficients below zero indicate that there is a strong direct correlation between income increasing (or decreasing) and demand for a good