Question

Suppose good A and good B are substitutes for one another and both are normal goods. The quantity of each good demanded (or purchased) is a function of its price (e.g, PA), the price of the substitute (e.g. PB ), and consumer income (I). Given this information, how many total demand elasticities can be calculated for goods A and B?

Answer 1

There can be three total demand elasticities calculated for goods A and B: the price elasticity of good A, the cross-price elasticity of good A, and the income elasticity of good A. The same applies to good B.

Step-by-step explanation:

Substitute goods have a positive cross-price elasticity of demand. In this case, if good A and good B are substitutes for each other, then an increase in the price of B will lead to a greater quantity consumed of A. Therefore, the demand for good A will be affected by the price of good B. Similarly, the demand for good B will be affected by the price of good A.

Since there are three factors that affect the quantity demanded of each good (its own price, the price of the substitute, and consumer income), we can calculate three different total demand elasticities for goods A and B. The total demand elasticity measures the responsiveness of the quantity demanded to changes in any of these factors.

For example, we can calculate the elasticity of the quantity demanded of good A with respect to its own price (PA). We can also calculate the elasticity of the quantity demanded of good A with respect to the price of the substitute (PB), and the elasticity of the quantity demanded of good A with respect to consumer income (I). Similarly, we can calculate these three elasticities for good B as well.