Final answer:
Elasticity of demand explains how sensitive consumer purchases are to price changes, with luxury items typically having more elastic demand than necessities. The cross-price elasticity of demand describes how the price change of one good affects the demand for another, with substitutes being affected oppositely to complements.
Step-by-step explanation:
The change in price determining whether consumers buy goods or not is referred to as elasticity of demand. This economic concept indicates how sensitive consumers are to price changes. For non-essential or luxury items, demand is more elastic, meaning that consumers are likely to demand more if the price decreases. Conversely, essential goods have inelastic demand; changes in price do not significantly influence consumer demand.
In addition, when discussing the cross-price elasticity of demand, the price change of one good affects the demand for another. If goods are complements, like bread and peanut butter, a price drop in one results in higher demand for the other. If goods are substitutes, such as plane tickets and train tickets, a price drop in one leads to decreased demand for the other as consumers switch their preference.
Another relevant concept is how expectations about future prices or other factors, such as natural disasters or shifts in income, can affect demand. This shift in demand represents a change in the quantity demanded at every price due to economic factors other than the price itself, such as upcoming price changes, which may cause consumers to purchase goods in advance.