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Explaining elasticilty coefficients

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Please explain the elasticity coefficient for elasticity of demand, cross-price elasticity, and income elasticity.

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Solution:

1. Elasticity of Demand

Generally elasticity of demand refers to price elasticity of demand. Price elasticity is the percentage relationship between quantity demanded and price i.e. percentage change in quantity demanded relative to percentage change in price.

Price elasticity of demand=% change in quantity demanded/ % change in Price

Price and quantity demanded move in opposite direction. If the price increases, quantity demanded decreases and if the price decreases, quantity demanded increases. So, coefficient of price elasticity of demand is always negative.

There can be three cases.

Case 1: Absolute value of price elasticity is greater than 1
In such case demand is said to be elastic. In this case 1% change in price causes a change in quantity demanded by greater than 1%. ...

Solution Summary

Solution describes the coefficients of price elasticity of demand, cross price elasticity of demand and income elasticity of demand.

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