ECONOMIC PRINCIPLES - Assignment Example

For good which are substitutes (eg. Tea and coffee), the increase in price of one product leads to an increase in demand for others and this therefore gives a positive figure for cross elasticity of demands. For complementary goods like DVD player and DVDs, the cross elasticity of demand is a negative figure since when the demand for one product goes up, the quantity demanded of the complement also falls. The most major determinant of demand in such cases is price of the substitute / complement good.

Income elasticity of demand is an economic concept which measures the responsiveness in the quantity demanded of a product to a change in the the income level of a person. It can simply be measured by the formula : percentage change in quantity demanded / percentage change in income level. There are two types of goods, normal goods and inferior goods. The demand for normal goods goes up as income rises and this gives a positive income elasticity of demand. Then there are inferior goods, the demand for which goes down as income level rises (eg.

People would prefer eating chicken meat as compared to raw onions when their income rises) and they result in a negative figure for income elasticity of demand. Our product, the Magpie has a price elasticity of demand of 2.7. What this figure means is that the demand of this product is highly sensitive to a change in its price. To put it very simply, if the price of Magpie goes down by 1% then its demand would go up by 2.7% and viceversa. It is somewhat difficult to change the price of the products that have an elastic demand as such a step might cause the demand to fall my a huge margin.

Same is the case with Magpie. In this case an increase in price might mean we lose out our sales to out competitors and this face a decline in profits. It also means that if we decrease out prices we would be able to sell a