Analyzing Elasticities and Their Impact on Consumption
In this analysis, we will examine the elasticities of demand for good X, including own price elasticity, income elasticity, advertising elasticity, and cross-price elasticity with good Y. We will then determine how changes in various factors affect the consumption of good X.
Elasticities Data
– Own Price Elasticity of Demand (PED) = 5
– Income Elasticity of Demand = 1
– Advertising Elasticity of Demand = 4
– Cross-Price Elasticity of Demand with Good Y = 3
Impact on Consumption
1. Price of Good X Decreases by 6%
– Using own price elasticity: PED = %ΔQd / %ΔP
– Given PED = 5 and %ΔP = -6%
– %ΔQd = PED * %ΔP = 5 * (-6%) = -30%
– The consumption of good X will decrease by 30%.
2. Price of Good Y Increases by 7%
– Using cross-price elasticity: XED = %ΔQd_X / %ΔP_Y
– Given XED = 3 and %ΔP_Y = 7%
– %ΔQd_X = XED * %ΔP_Y = 3 * 7% = 21%
– The consumption of good X will increase by 21%.
3. Advertising Decreases by 2%
– Using advertising elasticity: AED = %ΔQd / %ΔA
– Given AED = 4 and %ΔA = -2%
– %ΔQd = AED * %ΔA = 4 * (-2%) = -8%
– The consumption of good X will decrease by 8%.
4. Income Increases by 3%
– Using income elasticity: YED = %ΔQd / %ΔY
– Given YED = 1 and %ΔY = 3%
– %ΔQd = YED * %ΔY = 1 * 3% = 3%
– The consumption of good X will increase by 3%.
Conclusion
The elasticities of demand provide valuable insights into how changes in prices, income, advertising, and cross-prices affect the consumption of a good. By understanding these elasticities, businesses can predict and adapt to shifts in consumer behavior, leading to more effective pricing and marketing strategies for optimizing their market performance and profitability.
