EGT2 Essay Example | Topics and Well Written Essays - 1750 words

EGT2 - Essay Example We can also say that as the income of a consumer will increase, he will consume less of those goods The coefficient of Cross-price elasticity helps us determine whether the good is complementary or substitute to one another and if the elasticity has negative sign it means that the goods are complementary. Where as if the goods are strong substitutes to each other then there will be a positive sign(this can be easily understand from the example given in part A that there is a positive relationship between price of Pepsi and quantity demand of coke). Similarly, when the elasticity is POSITIVE it means it is a normal good (luxury good). As your income will increase you will demand more branded goods. Instead of a normal coffee you would like to enjoy coffee from Starbucks, designer dresses and Rolex watches. The coefficient of income elasticity for inferior good is always negative. (As income and quantity demand moves in opposite direction). And positive for normal goods (income and quantity demand moves in same direction) All above elasticity of demand plays a significant role in understanding the behavior of consumer or individual under each scenario. We can also predict a possible outcome with the changes in either of the determinant. If the substitute for a particular product is open to a consumer, then the demand would be elastic which means that the increase in price of product ‘A’ will decrease its quantity demanded and people will be willing to consume more of the substitute good as it is cheaper than product ‘A’ and also provides equal utility and vice versa. We know that there is always a positive relationship between price of one good and quantity demanded of the substitute good. Hence if price of a good ‘A’ increases then the quantity demand of its substitute will also increase. The larger is the share of consumer’s budget to a particular good,