Economics – Price elasticity, income elasticity and cross elasticity of demand | e-Consult
Price elasticity, income elasticity and cross elasticity of demand (1 questions)
Login to see all questions.
Click on a question to view the answer
A positive cross elasticity of demand indicates that the goods are substitutes. This means that when the price of one good increases, the quantity demanded of the other good increases. This happens because consumers switch to the relatively cheaper alternative.
Explanation: When the price of good A increases, consumers are incentivized to purchase good B instead, as it becomes relatively cheaper. This leads to an increase in the quantity demanded of good B. The positive cross elasticity reflects this inverse relationship between the prices and quantities demanded.
Examples:
- Coffee and Tea: If the price of coffee rises, consumers are likely to switch to tea, increasing the demand for tea.
- Butter and Margarine: If the price of butter increases, consumers will switch to margarine, increasing the demand for margarine.
- Diesel and Petrol: If the price of diesel increases, consumers may switch to petrol, increasing the demand for petrol.