Question

When you find cross-price elasticity of demand, you can determine whether the goods are substitutes or complements based on whether your answer is a positive or negative number. Explain. Include definitions of substitutes and complements in your explanation.

***How would I go about explaining this?
Thank you!! :)

Answer 1

How much do you know about "cross-price elasticity of demand" ?

Answer 2

ermm it's the percentage change in demand for one good at a given price that results from the percentage change in price of another good right?

Answer 3

yes more or less

Answer 4

you divide the two

Answer 5

this page has some good examples

http://www.econport.org/content/handbook/Elasticity/Cross-Price-Elasticity.html

Answer 6

here is another page that says about the same

https://www.boundless.com/economics/textbooks/boundless-economics-textbook/elasticity-and-its-implications-6/other-demand-elasticities-55/cross-price-elasticity-of-demand-212-12303/

but they use positive and negative signs

Answer 7

ahh okay:) so the question is asking to explain right? so would you suggest i use those two websites and form kind of a summary including the complements and substitutes? to explain how everything is determined?

Answer 8

oh what do you mean about pos and neg signs? does that affect things?

Answer 9

well they give good examples, but I would come up with examples of your own

Answer 10

think of a product that has a substitute

what two products are you thinking of?

Answer 11

ah okay awesome! those will be great! i'll study up on those!! thanks so much!!! :D

two products could be like you can substitute margin and butter?

Answer 12

*margarine

Answer 13

imagine that the price of margarine goes up

what happens to the demand of butter?

Answer 14

demand of butter rises?

Answer 15

yes

Answer 16

okay, so incorporate something like that into my explanation? :O

Answer 17

yes that's what I would do

Answer 18

go to the formula on this link

https://www.boundless.com/economics/textbooks/boundless-economics-textbook/elasticity-and-its-implications-6/other-demand-elasticities-55/cross-price-elasticity-of-demand-212-12303/

Answer 19

do you see the fraction?

Answer 20

okay awesome!! i will do that!! :) also, i have one more that's kind of similar. What do you think of this one?

When you find income elasticity of demand, you can determine whether the goods are normal or inferior based on whether your answer is a positive or negative number. Explain. Include definitions of inferior and normal goods in your explanation.

and income elasticity of demand is the measure of how much the quantity demanded for a particular good at a particular price changes when income changes? the percentage change in demand divided by the percentage change in income?

and yes!! I see the fraction:)

Answer 21

oh wait, this formula works too

http://www.econport.org/content/handbook/Elasticity/Cross-Price-Elasticity.html

Answer 22

use that?

Answer 23

oh so use either of them?

Answer 24

yeah either works

Answer 25

okay awesome! :) yay i'll research on that and form an explanation!! :D did you see the other problem i typed up? :D

Answer 26

yeah

Answer 27

you have the right definition for income elasticity of demand

Answer 28

I would read this article here

http://www.investopedia.com/terms/i/incomeelasticityofdemand.asp

Answer 29

tell me what you think

Answer 30

ooh yay! :D

okay one sec :D

Answer 31

oh so it's dividing again? based on change in demand and change in income? and so i'd explain how and why it is "very sensitive to changes in income" ?

Answer 32

and use examples?

Answer 33

what are some good examples?

Answer 34

ermm it kind of has to do with normal goods vs luxury goods and how change in demand and income relate to those goods right?

so would like arrowhead water and evian water be an example?

Answer 35

maybe, I'd think that both are about the same water though. So I'd use a different example

Answer 36

ohh okay what about like fancy spa facials that are expensive vs the cheaper ones that you buy and put on yourself? does that count? hahaa

Answer 37

sure that works

Answer 38

ah okay awesome!! :D hehe

Answer 39

another example is hot dogs and steak

hot dogs are an inferior good (as income rises, demand for hotdogs goes down)
steak is a normal good (as income rises, demand rises)

Answer 40

and you can use the formula to figure out which is which (and the article also states the rules to determining which is which)

Answer 41

ahh okay i see :) okay i will read those articles more in depth nd figure it all out!! :D thanks so much!!! :)

Answer 42

you're welcome