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Economic Analysis - Essay Example

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Elasticity value which is greater than one indicates that the demand for good is affected significantly by the price. It is measured as the…
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Economic Analysis
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Download file to see previous pages It is expressed as a percentage change in the quantity of a product demanded as a result of a small change in price. In reality, the price elasticity for demand is affected by many other factors other than just the price of commodity. When making calculations, it is normally assumed that all the other factors which could affect PED remain constant. High price elasticity means that the demand for the product is extremely sensitive to changes in commodity price. A zero measure shows that the demand is inelastic and thus will not be affected by changes in pricing. When the value is one, it shows that the demand is perfectly elastic and thus a pricing change will result to an equal change in demand. When the elastic is more than one, it implies that the demand is elastic and when the pricing is changed, it will automatically result in change in the demand from the item as wrong as all the another factors are kept constant.
The cross-price elasticity measures the responsiveness of a product demand to changes in price of another commodity. It is measured as a percentage of change observed in the demand for a product as a result of price change of a completely different commodity. It can be used to determine the type of relationship existing between two products (Mankiw 2012). It allows economists to make a distinction between complementary and substitute commodities. Products can be defined as compliments of each other when the calculation of the cross elasticity for demand yields a negative result. When the measure gives a positive value, it is an indication that the products are substitutes of each other. When the calculations yield a zero measure, then there is no relationship between the products (Wetzstein 2013). When a competitor reduces prices of its prices, rival organization will have to consider the calculation of cross-price elasticity of demand in estimating the impact of this price change on the demand for its products. This in turn makes the ...Download file to see next pagesRead More
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