Briefly explain the types of elasticity of demand? What is the relevance of cross elasticity of demand?
The types of elasticity of demand include price elasticity of demand, income elasticity of demand, and cross elasticity of demand.
1. Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It can be classified as elastic (quantity demanded changes significantly with a change in price), inelastic (quantity demanded changes slightly with a change in price), or unitary (quantity demanded changes proportionally with a change in price).
2. Income elasticity of demand measures the responsiveness of quantity demanded to a change in income. It can be classified as normal (quantity demanded increases with an increase in income) or inferior (quantity demanded decreases with an increase in income).
3. Cross elasticity of demand measures the responsiveness of quantity demanded of one good to a change in the price of another good. It can be used to determine whether goods are substitutes (positive cross elasticity) or complements (negative cross elasticity).
The relevance of cross elasticity of demand lies in helping firms understand how changes in the price of one product will affect the demand for another product. This information can be used to make pricing and marketing decisions, such as determining pricing strategies or identifying potential opportunities for product differentiation.