The law ofdemand stat

es t
hat
 quant
it
y purchased v
ari
es i
nver
sel
y wi
th pr
ice.I
n ot
her
words, 
thehi
ghert
hepr
ice,
thel
owerthequant
it
ydemanded. 

Thi
soccur
sbecauseof
 di
mini
shi
ngmar
ginal
uti
l
ity

TheLawOfDimini
shingMarginalUt
il
it
ystat
est
hatallel
seequalasconsumpt
ioni
ncr
easest
he
margi
nal
uti
l
ityder
ivedfr
om eachadditi
onal
uni
tdecl
i
nes

Det
ermi
nant
sofDemand

Whenpri
cechanges,quant
itydemandedwillchange.Thatisamovementalongthesame
demandcur
ve.Whenfactor
sotherthanpr
icechanges,demandcur
vewi
llshi
ft
.Thesear
ethe
det
ermi
nant
softhedemandcurve.

1. 
Income:Ariseinaperson’
sincomewil
lleadtoanincreasei
ndemand( shi
ftdemandcur
vet
o
ther i
ght
),afallwil
lleadtoadecreaseindemandf ornor malgoods.Goodswhosedemand
vari
esinver
sel
ywi thi
ncomearecall
edinf
eriorgoods(
e.g.HamburgerHelper
).

2. 
ConsumerPref
erences:Fav
orabl
echangel
eadst
o an i
ncr
easei
n demand,unf
avor
abl
e
changeleadt
oadecrease.

3.
 NumberofBuy
ers:t
hemor
ebuy
ersl
eadt
oani
ncr
easei
ndemand;f
ewerbuy
ersl
eadt
o
decr
ease.

4.
 Pr
iceofr
elat
edgoods:

a.Subst
it
utegoods(thoset
hatcanbeusedt or
epl
aceeachot
her
):pr
iceofsubst
it
uteand
demandfort
heothergoodar
edir
ect
lyr
elat
ed.

Exampl
e:I
fthepr
iceofcof
feer
ises,
thedemandf
ort
eashoul
dincr
ease.

b.Complementgoods(thosethatcanbeusedt
oget
her
):pr
iceofcompl
ementanddemandf
or
theot
hergoodareinv
erselyr
elated.

Exampl
e:i
fthepr
iceofi
cecr
eam r
ises,
thedemandf
ori
ce-
cream t
oppi
ngswi
l
ldecr
ease.
5.
 Expect
ati
onoff
utur
e:

a.Futur
epri
ce:consumers’curr
entdemandwi l
lincr
easeiftheyexpecthi
gherf
utur
epr
ices;
thei
rdemandwil
ldecr
easeiftheyexpectl
owerf
uturepri
ces.

b.Futur
eincome:consumer
s’curr
entdemandwilli
ncr
easei
ftheyexpecthi
gherf
utur
eincome;
thei
rdemandwilldecr
easei
ftheyexpectl
owerf
utur
eincome

El
ast
ici
tyofdemand

per
cent
ageofchangei
nthequant
it
yindemanddi
vi
dedbyt
heper
cent
agechangei
npr
ice.

I
fthepr
iceel
ast
ici
tyofdemandi
sgr
eat
ert
han1,
iti
sel
ast
ic

Supposet hatasof
tdrinkcompanycal cul
atesthatt
hedemandf orabottl
eofit
ssodaincreases
fr
om 100t o110af t
ert hepriceiscutf r
om $2t o$1.50.Thepr i
ceelasti
cit
yofdemandi s
calcul
atedasthepercentagechangeinquant i
tydemanded(110-100/100=10%)di v
idedbya
percentagechangeinprice($2-$1.50/$2) .Thepri
ceel
asti
cityofdemand,i
nt hi
scase,i
s0.4.
Sincetheresul
tisl
esst han1,iti
sinel
asti
c.Thechangeinpricehadli
tt
leimpactonthequanti
ty
demanded.

(
a)I
nfi
nit
eorPer
fectEl
ast
ici
tyofDemand:

Letasf ir
sttakeoneext remecaseofelast
ici
tyofdemand, v
iz.,wheniti
s
i
nf i
nit
eorper fect.Elast
ici
tyofdemandisinfi
nit
ywhenev enanegl i
gibl
e
falli
nt hepr i
ceoft hecommodi t
yleadstoani nf
ini
teextensioninthe
demandf orit
.I nFig.10.1thehori
zont
alstr
aightl
i
neDD’showsi nfi
nit
e
elasti
cit
yofdemand.Ev enwhent hepri
ceremainst
hesame, t
hedemand
goesonchangi ng

(
b)Per
fect
lyI
nel
ast
icDemand

Theot herextr
emel imitiswhendemandi sperfect
lyi
nel
asti
c.Itmeansthathowsoev
ergr
eat
theriseorf al
li nthepr i
ceoft hecommodi tyinquest
ion,i
tsdemandr emains
absol
ut el
yunchanged.InFi g.10.
2,thev
erti
calli
neDD’showsaper f
ect
lyinel
asti
c
demand.I notherwor ds,inthiscaseel
asti
cit
yofdemandi szero.Noamountof
changei npr
iceinducesachangei ndemand.

I
nther ealworl
d,ther
eisnocommoditythedemandf orwhi
chmaybeabsolut
ely
i
nelast
ic,i
.e.
,changesini
tspri
cewil
lfailt
obr i
ngaboutanychangeatal
lint
he
demand f orit
.Some extensi
on/
contract
ion i
s bound t
o occurthati
s why
economistssaythatel
ast
ici
tyofdemandisamatt
erofdegreeonly.I
nthesamemanner ,t
here
arefew commodi ti
esinwhosecaset hedemandisperfectl
yelasti
c.Thus,i nreall
i
fe,the
el
asti
cityofdemandofmostgoodsandser vi
cesl
iesbet
weent hetwol i
mi t
sgivenabove,vi
z.,
i
nfini
tyandzero.Somehavehighl
yel
asti
cdemandwhil
eothershavelesselasti
cdemand.

(
c)Ver
yEl
ast
icDemand:

Demandi ssai
dtobeveryelasti
cwhenev enasmal lchangeinthepri
ce
ofacommodi tyl
eadstoaconsi derabl
eext ensi
on/con­t r
acti
onofthe
amountdemandedofit
.InFig.10.3,DD’curveill
ust
ratessuchademand.
As a resul
tofchange ofT i nt he price,the quanti
ty demanded
ext
ends/contr
act
sbyMM’ ,
whi chclearl
yiscompar ati
velyalar
gechange
i
ndemand.

(
d)LessEl
ast
icDemand:

When ev en a subst ant

ial change in pri
ce brings onl
y a smal l
extensi
on/ contract
ioni
ndemand,i tissai
dtobelessel
asti
c.I
nFig.10.
4,DD’
showsl essel asti
cdemand.Af al
lofNN’inpr
iceext
endsdemandbyMM’only,
whichisv erysmal l
.

f
act
orsgov
erni
ngpr
iceel
ast
ici
tyofdemand

A changeinpri
cedoesnotal way
sleadt ot hesamepr opor
ti
onatechangeindemand.For
example,
asmallchangeinpri
ceofACmayaf f
ectit
sdemandt oaconsider
abl
eextent
/whereas,
l
argechangeinpri
ceofsaltmaynotaffectit
sdemand.So, el
asti
cit
yofdemandisdiff
erentf
or
dif
fer
entgoods.
Vari
ousfactor
swhichaffectt
heelasti
cit
yofdemandofacommodi tyare:

1.Nat
ureofcommodi
ty:

El
ast
ici
tyofdemandofacommodi
tyi
sinf
luencedbyi
tsnat
ure.Acommodi
tyf
oraper
sonmay
beanecessi
ty,
acomfor
toral
uxur
y.
i
.Whenacommodi t
yisanecessit
yli
kefoodgrai
ns,veget
ables,medi
cines,et
c.,it
sdemandis
gener
all
yinel
ast
icasiti
srequi
redforhumansurv
ivalandit
sdemanddoesnotf luctuat
emuch
wit
hchangeinpri
ce

i
i.Whenacommodi tyi
sacomf or
tli
kefan,r
efr
iger
ator
,et
c.,i
tsdemandi
sgener
all
yel
ast
icas
consumercanpost
poneit
sconsumpti
on.

i
ii
.Whenacommodi
tyi
sal uxur
yli
keAC,DVDpl
ayer
,et
c.,i
tsdemandi
sgener
all
ymor
eel
ast
ic
ascompar
edt
odemandforcomfor
ts.

i
v.Theter
m‘luxur
y’i
sarelat
ivet
erm asanyi
tem (
li
keAC)
,maybeal
uxur
yforapoorper
sonbut
anecessi
tyf
orarichper
son.

2.Av
ail
abi
l
ityofsubst
it
utes:

Demandforacommoditywi t
hl ar
genumberofsubsti
tut
eswi
llbemor eel
astic.Thereasoni
s
t
hatevenasmallr
isei
nitspri
ceswi l
li
nducethebuy
erstogofori
tssubst
it
utes.Forexample,
a
ri
sei
nthepri
ceofPepsiencouragesbuyer
stobuyCokeandvi
ce-v
ersa.

Thus,av ai
l
abil
it
yofcl
osesubst
it
utesmakesthedemandsensi
ti
vetochangeinthepri
ces.On
theot herhand,commodi
ti
eswithfew ornosubst
it
utesl
ikewheatandsalthavelesspri
ce
elast
icit
yofdemand.

3.I
ncomeLev
el:

Elast
ici
tyofdemandforanycommodi t
yisgener all
yl essforhigherincomel evelgroupsin
compar i
sontopeopl
ewithl ow i
ncomes.I thappensbecauser i
chpeopl earenoti nfl
uenced
muchbychangesi nthepriceofgoods.But ,poorpeopl earehighlyaffect
edbyi ncreaseor
decreaseint
hepri
ceofgoods.Asar esul
t,demandf orlowerincomegr oupishighl
yelasti
c.

4.Lev
elofpr
ice:

Lev elofpri
cealsoaffectsthepri
ceelasti
cit
yofdemand.Costl
ygoodslikelapt
op,Pl
asmaTV,
etc.hav ehighl
yelasti
cdemandast heirdemandisverysensit
ivetochangesinthei
rprices.
Howev er
,demandf orinexpensi
vegoodsl i
keneedl
e,matchbox,etc.i
sinelast
icaschangein
pricesofsuchgoodsdonotchanget heirdemandbyaconsiderabl
eamount .
5.Post
ponementofConsumpt
ion:

Commoditi
eslikebiscui
ts,softdr
inks,et
c.whosedemandisnotur gent
,havehighl
yelasti
c
demandastheirconsumptioncanbepostponedi
ncaseofanincreaseinthei
rpr
ices.However,
commodit
ieswithurgentdemandlikeli
fesavi
ngdrugs,
hav
einelasti
cdemandbecauseoft hei
r
i
mmediaterequir
ement.

6.NumberofUses:

Ifthecommodityunderconsiderat
ionhassev er
aluses,thenit
sdemandwi l
lbeelasti
c.When
priceofsuchacommodi t
yincreases,t
henitisgeneral
l
yputt oonl
ymor eurgentusesand,asa
result
,it
sdemandfal
ls.Whent hepri
cesfal
l
, t
henitisusedforsati
sfy
ingevenlessurgentneeds
anddemandr i
ses.

Forexample,electr
icit
yisamul t
ipl
e-usecommodi t
y.Falli
nitspri
cewillr
esultinsubst
ant
ial
i
ncreaseinitsdemand,par t
icul
arl
yint hoseuses(l
i
keAC,Heatconv ect
or,et
c.),wher
eitwas
notemployedf ormerlyduetoitshighpr i
ce.Ontheotherhand,acommodi t
ywi thnoorfew
al
ternat
iveuseshasl essel
asti
cdemand.

7.Shar
einTot
alExpendi
tur
e:

Proporti
onofconsumer ’
sincomethati
sspentonaparti
cul
arcommodi
tyal
soi
nfl
uencesthe
elast
ici
tyofdemandf orit
.Great
erthepr
oport
ionofi
ncomespentont
hecommodi
ty,moreis
theelast
ici
tyofdemandforitandvi
ce-
ver
sa.

Demandf orgoodsli
kesalt
,needl
e,soap,matchbox,et
c.tendst
obei nel
ast
icasconsumers
spendasmal lpr
oport
ionofthei
rincomeonsuchgoods.Whenpr i
cesofsuchgoodschange,
consumersconti
nuetopurchasealmostthesamequant i
tyofthesegoods.However,i
fthe
proport
ionofi
ncomespentonacommodi tyi
slarge,
thendemandforsuchacommoditywil
lbe
el
astic.

8.Ti
mePer
iod

Pr
iceel
ast
ici
tyofdemandisal
waysrel
atedt
oaperi
odofti
me.Itcanbeaday,aweek,amont
h,
ayearoraperiodofsever
alyear
s.El
asti
cit
yofdemandvar
iesdirect
lywi
ththeti
meperi
od.
Demandi
sgener
all
yinel
ast
ici
ntheshor
tper
iod.

Ithappensbecauseconsumer sfindi
tdif
fi
cul
ttochangethei
rhabit
s,i
nt heshor
tper
iod,i
norder
torespondtoachangeint hepriceofthegi
vencommodi t
y.However,demandismoreelast
icin
l
ongr im asitiscompar ati
velyeasi
ert oshi
fttoothersubst
itut
es,ifthepri
ceoft hegiven
commodi tyr
ises.

9.Habi
ts:

Commodi t
ies,whichhavebecomehabitualnecessi
ti
esfortheconsumer s,havelessel
ast
ic
demand.Ithappensbecausesuchacommodi t
ybecomesanecessi tyf
ortheconsumerandhe
cont
inuestopur chaseitevenifi
tspri
cer i
ses.Alcohol
,tobacco,ci
gar
et t
es,etc.ar
esome
examplesofhabitfor
mingcommodit
ies.

Finall
yitcanbeconcludedt hatelast
ici
tyofdemandforacommodi tyi
saffect
edbynumberof
factors.However
,iti s dif
ficul
tt o say,whi
ch par
ti
cularfact
ororcombi nati
on off
act
ors
determinestheel
ast
icit
y.Italldependsuponcir
cumstancesofeachcase.

Pr
iceEl
ast
ici
tyofDemandi
susef
uli
nthef
oll
owi
ngway
s:

1.Usef
ulf
orBusi
ness:

I
tenabl
est
hebusi
nessi
ngener
alandt
hemonopol
i
stsi
npar
ti
cul
art
ofi
xthepr
ice.

St
udy i
ngthenatur
eofdemandt hemonopoli
stf
ixeshi
gherpr
icesfort
hosegoodswhichhave
i
nelast
icdemandandlowerpr
icesforgoodswhi
chhaveelast
icdemand.I
nthi
sway,thishel
ps
hi
mt omaximizehispr
ofi
t.

2.Fi
xat
ionofPr
ices:

ADVERTI
SEMENTS:
Itisver
yusefult
ofixthepri
ceofjoi
ntl
ysuppl
i
edgoods.Inthecaseofj
ointpr
oductsl
ikepaddy
andst r
aw,thecostofproduct
ionofeachisnotknown.Thepriceofeachisthenfi
xedbyits
elast
icandi
nelast
icdemand.

3.Hel
pful
toFi
nanceMi
nist
er:

Ithel
pstheFinanceMi ni
stert
ol ev
yt axongoods.Af t
erl
evyi
ngtaxesmor eandmor eongoods
whichhaveinelasti
cdemand,t heGov er
nmentcollectsmorerevenuefr
om t hepeopl
ewit
hout
causi
nginconveniencetothepeople.Moreov
er,i
tisalsousef
ulforthepl
anning.

4.Fi
xat
ionofWages:

Itgui
destheproducer
stof
ixwagesforlabour
ers.Theyf
ixhi
ghorl
owwagesaccor
dingt
othe
elast
icori
nel
asti
cdemandfort
helabour
.

5.I
ntheSpher
eofI
nter
nat
ional
Trade:

I
tisofgr
eatersigni
fi
cancei
nthesphereofint
ernat
ionalt
rade.I
thel
pstocal
cul
atethet
ermsof
t
radeandtheconsequentgai
nf r
om forei
gntr
ade.Ifthedemandforhomeproductisi
nel
ast
ic,
t
hetermsoftradewill
beprof
it
ablet
ot hehomecount r
y.

6.Par
adoxofPov
ert
y

I
texplai
nstheparadoxofpovertyinthemidstofpl
ent
y.Abumpercr opi
nsteadofbri
ngi
ng
pr
osperi
tymayresultindi
saster
,ifthedemandfori
tisinel
ast
ic.Thi
sisspecial
l
yso,ift
he
pr
oductsar
eperi
shableandnotstor
able.

7.Ef
fectonEmpl
oyment
:

Theeffectofmachinesonemploymentoppor tunit
iesdependsonelast
ici
tyofdemandforthe
goods produced by such machi
nes.I nt he ini
tialst
age,use ofsuch machines cause
unemploymentandpriceswil
lal
sofal
l.Butwhendemandf orsuchcommodi t
iesi
smoreelast
ic,
thenf
allinpri
ceswil
lgener
atemoreincreaseinit
sdemand.
Asar esul
t,demandwillst
imul
ategreat
erpr
oduct
ionandhencemoreempl
oyment
.Ifdemand
forcommodi ti
esproducedbyt hesemachi
nesisi nel
ast
ic,t
henevenf
alli
npri
cewi l
lnot
i
ncreasedemandaswel lasemployment
.

8.Si
gni
fi
cantf
orGov
ernmentEconomi
cPol
i
cies:

Theknowledgeofel
ast
icityofdemandisver
yimport
antf
orthegov ernmenti
nsuchmattersas
cont
rol
li
ngofbusinesscy cles,r
emovi
nginfl
ati
onar
yanddef l
ati
onar ygapsintheeconomy .
Simi
lar
ly,
forpri
cest
abi
lizati
onandthepur
chaseandsal
eofstocks,infor
mati
onaboutel
asti
cit
y
ofdemandismostuseful.

9.I
nci
denceofTaxat
ion

I
ncidenceoft axli
esont hepersonwhoul t
imatelypayst
hetax.Theinci
dencei sont hebuyer,if
demandi sper f
ectl
yinelasti
c.Hewi llgoonbuy ingasmuchasbef oredespitethepr icerise.
Thus,thegov er
nmenthast okeepthewat chont heul
ti
mateburdenofthet ax,whichdepends
ont heelast
icit
yofdemandoft hecommodi tytaxed.I
fnecessari
es,whichhav el esselastic
demandar etaxedt heburdenwillf
allmor eont hepoorsect
ionsofsoci
ety.Therefore,pri
ncipl
e
ofj
usticeintaxati
onisbasedonel astici
tyofdemand.

10.Changesi
nRat
eofExchange:

Rateofexchangebet weentwocur r
enciescanbechangedt hroughdev aluat
ionorov er
valuati
on
ofonecur r
encyinr el
ati
ont oothercurrenci
es.Acount r
ywhi l
edeci dingforsuchacour seof
acti
onwilltakeintoconsider
ationtheelasti
cit
yofdemandf oritsexpor t
sandi mpor t
s.Ifthe
governmentdevaluesthecurrencywithoutconsider
ingtheelasti
cit
yofdemandf ori t
sexpor t
s
andi mport
si tmaynotbeabl et ocor r
ectunfavorabl
ebalanceofpay ments.Undert hese
ci
rcumstancesthedemandbot hfori
tsexportsandimportsturnsoutt obeinel
astic.

11.Joi
ntPr
oduct
s:

Theconceptofelasti
cityofdemandplaysanimportantrol
eindet ermini
ngthepriceofjoint
product
s.Incaseofjointproduct
sli
keski
nandmeatofgoat ,separatecost
sar enotknown.
Theproducerwil
lbeguidedmost l
ybydemandandit
snat ur
ewhilefi
xinghispr
ice.Fori
nstance,
whengoatisbought,
itisnotkeptinmi
ndthesepar
atecostsofskinandmeat .
Whent hesell
ersellstheski
nandmeat ,thesel
lerkeepsi nmindtheel
astici
tyofdemandofski
n
andmeat .I
felastici
tyofdemandf ormeatislessel ast
ic,i
nthatcasethepr i
ceofmeatwil
lbe
higher
.Ontheot herhandifel
astici
tyofdemandf orskinismoreelast
ic,
inthatcaset
hepri
ceof
theskinwil
lbelowandv i
ceversa.

12.I
nter
nat
ional
Trade

Theconceptofel
asti
cit
yofdemandal soplaysasignif
icantrol
eintheint ernati
onalt
radeorthe
ter
msoft r
ade.Iti
sthenat ureofdemandwhi chishel pf
ulindeter
mi ningt heamountofgai n
bei
ngenjoyedbydiff
erentcountr
ies.Theter
msoft radewoul dbef av
our ablei
ncaseoft hose
count
ri
es,whoseexpor t
sar eoft henat
ureofmor eel asti
cdemand.Ont heotherhand,the
ter
msoftradewouldbeun-favour
ableift
heexport
sofacount r
yareoft henat ureofl
esselasti
c
demand.

13.Mar
ketf
orms:

Theconceptofel ast
ici
tyofdemandi salsousefulisknowi ngt hedi
ff
erentmarketforms.If
crosselasti
cit
yofdemandi sinfi
nit
e,i
nt hatcasethereisperfectcompeti
ti
oninthemar ket.I
f
crosselasti
cit
yiszero(orEc=0)itisacaseofabsol uteorpuremonopoly.Ifcr
ossel
astici
tyof
demandi slessthanone( orEc<1) ,int hatcaset hereisr el
ati
vemonopoly.Andi fcross
el
astici
tyofdemand i s gr
eaterthan one (orEc >1) ,i
nt hatcase,thereis monopolisti
c
competiti
onori mperf
ectcompeti
ti
on.

14.Det
ermi
nat
ionofPr
iceofPubl
i
cUt
il
it
ies:

Thi
sconceptissigni
fi
cantinthedeter
minati
onofthepri
cesofpubl
icutil
it
yserv
ices.Economic
welf
areofthesociet
ylargel
ydependsupont hecheapavai
l
abi
li
tyoftheessenti
alproductsli
ke
water
,elect
ri
cit
y,cooki
nggas,t r
ansport
ati
onetc.Forsuchcommodi t
ies,demandi sinel
asti
c
andtheseshoul
dbecont rol
l
edbyt hegover
nment.

Thegovernmentwil
ldist
ri
but
et heseproductsatfai
rpr
ice.Ther
efore.Gov
ernmenthel
pstofi
x
thepri
cesofnecessi
ti
esofli
fe.Thus,elast
ici
tyofdemandisav eryimport
antt
oolofanal
ysi
s
anditpl
aysanimport
antrol
eineconomi canaly
sis.

I
ncomeEl
ast
ici
tyofDemand

Theincomeelasti
cit
yofdemandi
stheper
cent
agechangei
nquant
it
ydemandeddi
vi
dedbyt
he
per
centagechangeinincome,
asf
oll
ows:
i
ncomeel
ast
ici
tyofdemand=per
centchangei
nquant
it
ydemanded/
per
centchangei
nincome

Formostpr oduct s,mostoft het ime,t hei ncomeel asti

cityofdemandi sposi tiv
e:t hatis,ar i
se
i
ni ncomewi l
lcauseani ncreaseint hequant itydemanded.Thi spatterniscommonenought hat
thesegoodsar er eferr
edt oasnor malgoods.Howev er,f orafewgoods, ani ncreasei nincome
meanst hatonemi ghtpurchasel essoft hegood; forexampl e,thosewi t
hahi gheri ncomemi ght
buyf ewerhambur gers,becauset heyar ebuy i
ngmor est eaki nst
ead,ort hosewi thahi gher
i
ncomemi ghtbuyl esscheapwi neandmor eimpor t
edbeer .Whent hei ncomeel astici
tyof
demandi snegat i
ve,thegoodi scal l
edani nferi
orgood.Theconcept sofnor malandi nf
eri
or
goodswer ei ntroducedi ntheSuppl yandDemandmodul e.Ahi gherlevelofincomef oranor mal
goodcausesademandcur vetoshi f
tt ot her i
ghtf oranor malgood,whi chmeanst hatthe
i
ncomeel asticityofdemandi sposi ti
v e.How f arthedemandshi ftsdependsont heincome
elasti
cit
yofdemand.Ahi gherincomeel asticit
ymeansal ar
gershift.Howev er,forani nf
eri
or
good—t hati s,whent heincomeel asti
cityofdemandi snegat i
ve—ahi gherlevelofi ncomewoul d
causet hedemandcur vef orthatgoodt oshi fttot heleft.Again,howmuchi tshi ft
sdependson
howl arget he( negat i
ve)incomeel ast
icityis.

Cr
oss-
Pri
ceEl
ast
ici
tyofDemand

Achangei nthepriceofonegoodcanshi f
tthequant itydemandedf oranothergood.I fthet wo
goodsar ecompl ement s,li
kebr eadandpeanutbut ter
,t henadr opi nthepriceofonegoodwi l
l
l
eadt oani ncreaseinthequant it
ydemandedoft heot hergood.Howev er,i
ft het wogoodsar e
substit
utes,li
keplanet icketsandt raintickets,thenadr opinthepr iceofonegoodwi llcause
peoplet osubstit
utetowar dt hatgood,andt or educeconsumpt ionoft heot hergood.Cheaper
planet i
cketsleadt ofewert raintickets,andv i
cev ersa.Thecr oss- pr
iceelast i
cit
yofdemand
put ssomemeatont hebonesoft hesei deas.Thet er
m“ cr
oss-price”refer
st ot heideathatthe
priceofonegoodi saff
ect i
ngt hequant it
ydemandedofadi f
ferentgood.Speci fi
call
y,t
hecross-
priceelasti
cit
yofdemandi stheper centagechangei nt hequantityofgoodAt hatisdemanded
asar esultofapercentagechangei nt hepr i
ceofgoodB, asfol
lows:

cr
oss-
pri
ceel
ast
ici
tyofdemand

=per
centchangei
nQdofgoodA/per
centchangei
npr
iceofgoodB

Subst
it
utegoodshaveposit
ivecross-pri
ceelasti
cit
iesofdemand:ifgoodAi sasubsti
tut
efor
goodB,li
kecof
feeandtea,t
henahi gherpri
ceforBwi llmeanagreaterquant
it
yofAconsumed.
Complementgoodshavenegati
vecross-pri
ceelasti
cit
ies:
ifgoodAisacompl ementf
orgoodB,
l
ikecoff
eeandsugar,
thenahigherpriceforBwillmeanal owerquanti
tyofAconsumed.