Questions on Economic Principles - Assignment Example

The concept of Own Price Elasticity of Demand revolves around the formula of % change in the quantity demanded over a % change in the price (Sloman, 2009). Price Elasticity of Demand (Formula) = %?Qd/%?P The determinants for the Price Elasticity of Demand are the number of close substitutes available, the proportion of income spent and the time period. In this case the cabbages have a number of close substitutes; hence it will be more elastic in terms of the variation in price. The cross elasticity of demand is the reaction of the demand for product A to a variation in price of product B (Sloman, 2009).

The formula will be as follows: Cross Elasticity of Demand (AB) = %?QDa/%?Pb In this case the major determinant is the intimacy of the substitute or the complementary good. If good A is a substitute to good B, then a price rise in good B will result in the rise in demand of good A. However, if good B is a complementary good to A, than an increase in price of B will decrease the demand for Good A. Income Elasticity of demand (IED) is the other concept which considers the income of any given individual and the relative reaction of a change in that income to that of the quantity demanded.

The determinant of the IED is the necessity of the good. For developed countries, the demand for luxury goods rises quickly with an increase in the consumer income in respect to the demand of basic goods (Sloman, 2009). The formula is as follows: Yed= %?Qd/%?Y The high positive value of the Cross Price Elasticity of Demand (CED) for Magpie against Eagle shows that the two products are very close substitutes of each other. This value of Cross Price Elasticity shows that the two companies are constantly competing with each other.

A slight decrease in the price of Eagle products will hugely decrease the Quantity Demanded of Magpie. The concept of advertising and marketing can be related with the Cross Price Elasticity of Demand. The concept of branding and consumer loyalty can be created for any company with intelligent marketing and heavy advertisements. Consumers have a choice when there are competitors competing to win them with the same products. Such a high cross price elasticity of demand for Magpie against Eagle shows that they have not been able to create brand loyalty for its customers.

They do not have the market power to reduce the substitution effect i.e. by creating brand loyalty and attracting customers. First let us take the situation of Magpie and the Eagle, with a cross price elasticity of +3.2. It can be interpreted with the formula. CED is the sensitivity of demand for Magpie to an alteration in the respective price of Eagle. The major determining factor for cross elasticity is the extra intimacy of the product to Magpie. The positive value shows that an enhancement in the price of Eagle will escalate the demand for Magpie and vice versa.

The large value of a positive 3.2 shows that a 1% increase in the price of Eagle will result in a massive 3.2% increase in the quantity demanded for Magpie. Hence and change in the price of the competitor will be closely monitored by Magpie. This high positive relation shows that consumers are very sensitive to price changes and will shift their interest to Eagle if Magpie increases its prices. There is also a positive relationship between the Quantity Demanded of Magpie and the change in the consumer