➢ Assignment# 01

• CROSS ELASTICITY OF DEMAND:

The cross elasticity of demand is an economic concept that measures the
responsiveness in the quantity demanded of one good when the price for another
good changes. Also good cross-price elasticity of demand, this measurement is
calculated by taking the percentage changes in the quantity demanded of one good
and dividing it by the percentage change in the price of other good .

➢ Example # 01

➢ Explanation:-
When there is a strong complementary relationship, the cross elasticity will be negative.
A positive cross-price elasticity value indicates that the two goods are substitutes. the
case of perfect substitutes, the cross elasticity of demand will be equal to positive
infinity.A negative cross elasticity denotes two products that are complements, while a
positive cross elasticity denotes two substitute products. ... The exact opposite reasoning
holds for substitutes.
 ➢ Example #02:-

➢ Explanation:-
A positive cross-price elasticity value indicates that the two goods are substitutes. For
substitute goods, as the price of one good rises, the demand for the substitute good
increases

When cross price elasticity is positive, a small change in relative price causes a big
switch in consumer demand. If the cross-price elasticity of demand is positive, the goods
are substitutes.

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 ➢ Assignment# 02:-
• Income Elasticity
• Income elasticity of demand is the measure of degree of change in quantity
demanded for a commodity in response to the change in income of the
consumers demanding the commodity.
In simple words, it can be defined as the change in demand as a result of change
in income of the consumers. Often referred to as just ‘income elasticity, it is
denoted by Ey.

➢ Formula:
Income elasticity = (% change in quantity demanded) / (% change in income)

Expression of Income Elasticity of Demand

Where,
EY = Elasticity of demand
q = Original quantity demanded
∆q = Change in quantity demanded

y = Original consumer’s income

∆y= Change in consumer’s income
 ➢ Example:-
Suppose that the initial income of a person is Rs.2000 and quantity demanded for the
commodity by him is 20 units. When his income increases to Rs.3000, quantity
demanded by him also increases to 40 units. Find out the income elasticity of demand.
Solution:

Here,

q = 100 units
∆q = (40-20) units = 20 units
y = Rs.2000
∆y =Rs. (3000-2000) =Rs.1000

➢ Explanation:-
If there is direct relationship between income of the consumer and demand for the
commodity, then income elasticity will be positive. That is, if the quantity demanded for a
commodity increases with the rise in income of the consumer and vice versa,

it is said to be positive income elasticity of demand. For example: as the income of

consumer increases, they consume more of superior (luxurious) goods. On the contrary, as
the income of consumer decreases, they consume less of luxurious goods.