Price Elasticity

Jul 4th, 2016
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Assignment 2: Elasticity and Its Application Over the last year your boss has noticed that it would be useful for your firm to understand how consumers behave when variables in the market change and how these changes affect the total revenue for your product. You have been asked to do an analysis for your product, Good A, by addressing the following questions and reporting the results to your boss in a formal paper. Questions: Define the price elasticity of demand? What information does it provide? How is it calculated? Define the income elasticity of demand? What information does it provide? How is it calculated? Define the cross-price elasticity of demand? What information does it provide? How is it calculated?

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Elasticity1. Price elasticity of demand can be termed as the rate of responsiveness from thequantity demanded because of a price change to a product. Price elasticity helpsin showing the relation between price and the good. Higher the price elasticity,higher is the change in the demand of the product. Price elasticity of demand iscalculated as: (% Change in Quantity Demanded)/(% Change in Price)2. Income elasticity of demand can be termed as the rate of response of quantitydemand due to a raise (or lowering) in a consumers income. It helps in knowingthe sensitivity of demand of the products with the change in the income of theconsumer. Higher the income elasticity, more sensitive are the goods to theincome change. Income elasticity of demand is calculated as: (% Change inQuantity Demanded)/(% Change in Income)3. Cross-price elasticity of demand can be termed as the the rate

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