A:

Demand elasticity is an economic measure of the sensitivity of demand relative to a change in another variable. The quantity demanded of a good or service depends on multiple factors, such as price, income and preference. Whenever there is a change in these variables, it causes a change in the quantity demanded of the good or service.

For example, when there is a relationship between the change in the quantity demanded and the price of a good or service, the elasticity is known as price elasticity of demand. The two other main types of demand elasticity are income elasticity of demand and cross elasticity of demand.

Consumers' incomes play a very important role in the demand for a good or service. When there is a change in consumers' incomes, it causes a change in the quantity demanded of a good or service if all other factors remain the same. The sensitivity of a change in the quantity demanded of a good or service relative to a change in consumers' incomes is known as income elasticity of demand. The formula used to calculate the income elasticity of demand is the percent change in the quantity demanded of a good or service divided by its percent change in consumers' incomes.

If the income elasticity of demand is greater than 1, the good or service is considered a luxury and income elastic. A good or service that has an income elasticity of demand between zero and 1 is considered a normal good and income inelastic. If a good or service has an income elasticity of demand below zero, it is considered an inferior good and has negative income elasticity.

For example, suppose a good has an income elasticity of demand of -1.5. The good is considered inferior and the quantity demanded for this good falls as consumers' incomes rise.

Another example of demand elasticity is cross elasticity of demand. This measures how sensitive the quantity demanded of a good or service is relative to a change in the price of a similar good or service. The cross elasticity of demand is calculated by dividing the percent change of the quantity demanded of one good divided by the percent change in the price of a substitute good.

If the cross elasticity of demand of goods is greater than zero, the goods are said to be substitutes. With goods that have a cross elasticity of demand equal to zero, the two goods are independent of each other. If the cross elasticity of demand is less than zero, the two goods are said to be complementary.

For example, toothpaste is an example of a substitute good. If the price of one brand of toothpaste increases, the demand for another brand increases as well. An example of complementary goods are hot dog buns and hot dogs. If the price of hot dogs increases with everything else remaining unchanged, the quantity demanded for hot dog buns decreases.

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