The Elasticity Model of Consumer Behavior focuses on how changes in price, income, and other factors influence the quantity demanded of goods and services. The concept of elasticity measures the responsiveness of demand to changes in these variables.
Price Elasticity of Demand (PED):
- Definition: Measures the responsiveness of quantity demanded to a change in the price of the good or service.
- Formula: PED = (% Change in Quantity Demanded) / (% Change in Price)
- Types:
- Elastic (>1): Demand changes proportionally more than the price change. Consumers are highly responsive to price changes.
- Inelastic (<1): Demand changes less than the price change. Consumers are less responsive to price changes.
- Unitary Elastic (=1): Demand changes proportionally to the price change.
Income Elasticity of Demand (YED):
- Definition: Measures the responsiveness of demand to a change in consumer income.
- Formula: YED = (% Change in Quantity Demanded) / (% Change in Income)
- Types:
- Normal Goods (>0): Demand increases as income increases.
- Inferior Goods (<0): Demand decreases as income increases.
Cross-Price Elasticity of Demand (XED):
- Definition: Measures the responsiveness of demand for one good to a change in the price of another good.
- Formula: XED = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B)
- Types:
- Substitutes (>0): Demand for Good A increases as the price of Good B increases.
- Complements (<0): Demand for Good A decreases as the price of Good B increases.
Elasticity models help businesses and policymakers understand how changes in economic factors affect consumer behavior and adjust strategies accordingly.
Subscribe on YouTube - NotesWorld
For PDF copy of Solved Assignment
Any University Assignment Solution
.webp)
