Transcript counter-cyclical

Elasticity of Income &
Cross-Price Elasticity
Tim Odd
Elasticity of Income
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Measures the relationship between a
change in quantity demanded for a
good and a change in income.
Elasticity of Income =
% Change in Demand
/
% Change in Income
Normal Goods
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Normal goods have positive income
elasticity, so as income rises, demand
does as well.
Normal Necessities have income elasticity
between 0 and +1, so demand rises less
than proportionally to income.
Luxury Goods have an income elasticity
>+1, so demand rises more than
proportionally to income.
Inferior Goods

Inferior goods have negative
income elasticity, so as income rises,
demand falls. This is because
consumers will begin to buy superior
goods as they become able to afford
them.
Elasticity of Income
Product Ranges
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Income elasticity varies within
product ranges (group of similar
products targeted at differing
economic groups).
Similar products of varying qualities
will have different income elasticities.
e.g. First-class cabins on a plane vs.
Economy; First-class would have a
higher income elasticity.
Counter-Cyclical Products
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Because inferior goods tend to have
negative income elasticity, they are
counter-cyclical, and trend in the
opposite direction of the economy.
Consumer demand for counter-cyclical
products will increase if income falls, just
as it will decrease when income rises.
Counter-cyclical products are not
necessarily 'inferior' goods. (e.g. Sales of
items at hardware stores vs. Furniture
stores)
Cyclical vs. Counter-Cyclical
Products
Cross Price Elasticity


Measures the change in demand for
a good following a change in price of
another good.
CPE =
% Change in Demand of Good A
/
% Change in Price of Good B
Substitute goods

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When the price of a good increases,
the demand for substitute goods
increases. When the price of a good
decreases, the demand for substitute
goods decreases.
Thus, the cross price elasticity
demand is positive for substitutes
Complimentary Goods
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Complimentary goods share demand, so
when the price of one increases, the
demand for the other will decrease.
The cross price elasticity demand for
complimentary goods is negative, and is
more negative for closer related goods.
Example: Game consoles & their games
have a more negative elasticity than pizza
dough and tomatoes.
ADD CHART HERE
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YA DINGUS
Complimentary Goods + CPE
Relatedness of products
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Unrelated products will have zero
cross price elasticity on one another.
Example: A change in the price of a
piece of fine art will have no effect
on the demand of chocolate bars.
Cross-Price Elasticity
Brand Identity & Cross Price
Elasticity

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Products with a loyal customer base
are less sensitive to changes in price
of competing goods; lowering cross
price elasticity demand.
Example: Starbucks takes a
relatively small hit to sales when the
price of Tim Horton's coffee drops.