Elasticity of Demand - Assignment Example

Elasti of Demand Elasti of Demand Coffee is a type of beverage product that exhibits price elasti characteristics that explain cross elasticity of demand. Coffee has a cross price elasticity of demand in relation to a substitute beverage like tea or cocoa. This demand determines the comparative reaction in the amount of coffee to an adjustment in the cost of tea or cocoa (Nicholson and Snyder, 2014). Coffee and tea are examples of positive cross price elasticity of demand. The value of elasticity of demand normally differs along a demand curve.

On a demand curve for coffee, cross elasticity always differs since it straight. Coffee, tea, and cocoa are substitute products under the beverages category, which causes cross price elasticity to be positive. This means a rise in the price of coffee causes the demand for tea to rise (Nicholson and Snyder, 2014). A coffee processor will always record increased total income after it lowers the price of its coffee products because of cross elasticity. Cross elasticity occurs mostly because of two opposing forces on overall sales returns when coffee products decrease in price.

The first force originates from the processing company imposing a reduced price on every unit on sale (Nicholson and Snyder, 2014). The first force lowers total income. Nevertheless, the law of demand compels the amount of products customers are ready to buy to increase after a reduction in price. This law comes to play in the cross elasticity of demand for coffee. The other force of a reduction in coffee price is inclined to raise income since the amount of units sold rise too (Nicholson and Snyder, 2014).

ReferencesNicholson, W. and Snyder, C. (2014). Intermediate Microeconomics and Its Application. New York, NY: Cengage Learning.