2 Percentage of income The higher the percentage of the consumers income that

2 percentage of income the higher the percentage of

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no close substitutes the demand will be inelastic. 2. Percentage of income The higher the percentage of the consumer's income that the product's price represents, the higher the elasticity tends to be, as people will pay more attention when purchasing the good because of its cost. When the goods represent only a negligible portion of the budget the demand is inelastic. 3. The importance of the goods. The more necessary a good is, the lower the elasticity, as people will attempt to buy it no matter the price. Therefore, the demand for necessity good is inelastic while demand for goods which are not important and luxuries will be elastic. 4. Time period
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Time period is the short run and the long run period. The elasticity of demand is inelastic in the short run while in the long run; consumers have more time to respond to the price change, making demand elastic. 5. Income level Those with higher income will tend to have inelastic demand because being richer; they are less sensitive to price change. 6. Habits Habitual smokers and drinkers tend to have inelastic demand for cigarettes and liquors respectively. They will disregard any change in price, as these goods are necessities to them. 7. Brand loyalty An attachment to a certain brand will result in an inelastic demand as consumers are not sensitive to price change. Price elasticity of demand and its relation to total revenue Price elasticity of demand has a close relationship with total revenue. Total revenue is the amount of money received from product sales where: TR = Price X Quantity Any change in price, quantity or both will affect total revenue. Whether total revenue increases or decreases would depend on the price elasticity of demand. If demand is And price increase, total revenue will And price decrease, total revenue will Elastic Decrease Increase Inelastic Increase Decrease Unitary Not change Not change Cross elasticity of demand (XED) It measures the responsiveness of demand for a good to a change in the price of another good that is the percentage change in demand for Good X that occurs in response to a percentage change in price of Good Y. XED show the relationship between two goods which can be determined from the value of cross elasticity. Positive XED means an increase in the price of one product will cause an increase in demand for another product and vice versa. These goods are substitutes . Negative XED will indicate that an increase in price of one product will cause the demand for another product to decrease and vice versa showing the goods are complementary goods . Zero XED means that the goods have no relationship or independent goods . Calculated as:
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Percentage change in demand for good X E XY = ------------------------------------------------------- Percentage change in price of good Y OR Q 1X – Q 0X P 0Y E XY = ------------- X ------------- Q 0X P 1Y – P 0Y Income elasticity of demand Income elasticity of demand measures the responsiveness of the demand for a good to a change in the income .
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