What is the difference between price elasticity and cross elasticity of demand?

Answer 1

Cross price elasticity of demand measures how much demand of one good, say x changes when the price of another good, say y changes, holding everything else constant.

For example, you can measure what happens to the demand of bread when the price of milk changes.

The cross price elasticity is calculated as the percentage change in the quantity demanded of good x divided by the percentage change in the price of good y.

If the cross price elasticity is negative, then we call such goods Complements (example: Pizza and soft drinks -- they are consumed together).

If the cross price elasticity is positive, then we call such goods Substitutes (example: pizza and burgers -- you usually consume either or).

The income elasticity of demand measures the change in the quantity demanded of some good, when the income changes, holding everything else constant.

For example you can measure what happens to the demand for expensive red wine when income increases.

The income elasticity is calculated as the percentage change in the quantity demanded of the good divided by the percentage change in income.

If the income elasticity for a good is positive we call them normal goods. It can be between 0 and 1, and we call it income inelastic demand for goods such as food, clothing, newspaper. If it is above 1, we call it income elastic demand. Examples are the red wine, cruises, jewelry, art, etc.

If the income elasticity is negative, this means that as income increases, the quantity demanded for those goods actually decreases, we call those goods inferior goods. Examples are "Ramen noodles", cheap red wine, potatoes, rice. etc.

Answer 2

price elasticity of demand measures the responsiveness of quantity demanded when there is a change in price of the particular good you are examining. Cross elasticity of demand measures the responsiveness of quantity demanded when there is a change in price of OTHER goods.PED is always a negative value because the quantity demanded and price have an inverse relationship, i.e when price increases, quantity demanded will decrease and vice versa.

Whereas CED can be either positive or negative. It all depends on the nature of the goods you're examining. Two types of goods that play an influencial role in determining CED of a good is Complementary goods and Substitute goods. Take for example, CED of substitute goods are always positve. This is because the quantity demanded for the substitute goods has a positive relationship with the price of the initial good, i.e when price of initial good drops, the quantity demanded for substitute goods will drop as well. This is because consumers will always opt for the cheaper alternative, which in this case is the initial good, thus quantity demanded for its substitutes will decrease.

Answer 3

Price elasticity of demand is how sensitive a consumer is price changes - the % change in quantity demanded given a % change in price. It depends on whether the good is essential or non-essential, the availability of substitutes, and time. >1 means demand is elastic (non-essential with many substitute available. Income elasticity of demand is the % change in quantity demanded given a % change in income. This depends on whether good in question is a normal good or an inferior good. Positive income elasticity of demand means that it is a normal good.

Answer 4

Price elasticity is the effect on demand of differences in price - for example the effect on gasoline demand of a doubling of gasoline prices. Income elasticity is the effect on demand of changes in personal (or national) income - for example the effect on US demand for gasoline of a 2% drop in GDP (or other measures of national or personal disposalable incomes)

Answer 5

Elasticity of demand is the degree of change in demand of a product according to the changes in determinants of demand such as income, price, taste&preferences of the consumer; while price elasticity is the degree of change in demand according to the change in price of the commodity alone.