EGT 1 Task 2
A. Define the following three terms:
1. Elasticity of demand
The responsiveness or sensitivity of consumers to changes in pricing of products is measured with elasticity of demand. The more reactive consumers are to a price change, the more elastic or simply elastic a product is considered. The less reactive consumers are the less elastic or inelastic the product is (McConnnell,Brue 2011).
2. Cross-price elasticity (include substitutes and complements)
The change in demand in one product caused by a price change in another good is called cross price elasticity. The change in the price of one product or goods that causes a change in the demand for another product is measured on the x axis of the demand curve with the cross price elasticity (McConnnell,Brue 2011). Goods can be complimentary; such as a dvd movie (complementary good) that must be viewed with a dvd player (base good) or substitute; such as one brand of soup for another.
When goods are complementary that means they work together, so the relationship in their use reflects in the elasticity of price in relation to each other by moving in opposite directions. When goods work in conjunction with each other, cross price elasticity is negative- meaning an increase in the price of one product causes the demand for the other to decrease and a decrease in the price of one causes demand for the other to increase. For example if the price of dvd players decreases the demand increases and the price for dvd movies increases. In contrast if the player price increases, demand for players’ decreases as does the price for dvd movies.
If a product is a substitute and can be used instead of another the price and demand move in the same direction. When goods are substitutes for each other cross price elasticity is positive, which means that if the price of one product increases the demand for